As the Credit World Turns

You may remember sometime back I predicted that the underlying algorithms for Fair Isaac's FICO would change to accommodate the millions of folks who have (or are) losing their homes as well as the many more millions (many of the same as above) who are in credit card default hell. In order to win the foreclosure battle the way the Government has chosen to fight it, there must be relief so that people can get back into a house.

I also predict that underwriting standards will be changing some time soon to allow people easier passage through the lending process. I'll keep you abreast of that as it happens. In the meantime, this article I read the other day clearly shows how and why new FICO modeling is needed:

Is the New Credit Score Model Helping Home Buyers?

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RISMEDIA, September 9, 2009—Credit Expert Eddie Johansson believes the improved FICO 08 credit scoring model will increase the credit scores of a significant segment of borrowers, but it’s not helping home buyers. According to Johansson, president of Credit Security Group, a leading nationwide credit analysis and rescoring firm, that’s because the largest sources of home financing, Fannie Mae and Freddie Mac, have not yet approved it.

“When Fannie and Freddie approve it, it has arrived- but not until then,” he said. Neither organization has provided its schedule or intentions for approving the FICO 08-based credit scores available from two major credit bureaus. Credit scores help lenders determine whether a mortgage loan is approved and the interest rate offered. In general, the higher the score, the easier it is to get a mortgage loan and the lower the interest rate.

Johansson said his analysis predicts the new model- if approved- will have the most impact on the current refinancing boom and mid-to-higher-end home sales. Speaking to 150 bank executives at the Independent Bankers Association of Texas Leadership Conference in San Antonio and to banking educators attending the Financial Literacy Summit at the Federal Reserve Bank of Dallas, Johansson said, “If it’s implemented as expected, it is a great opportunity to boost the housing market.” Johansson believes the new model will be a more accurate measure of credit risk. “It takes into account more of the borrower’s history and penalizes them less for a single unusual event,” he said. “It also has more score card levels, allowing finer adjustment of credit scores.” He said it will reduce the power of unscrupulous credit collectors too, since a single bad event- reported in error- will have less impact on scores.

FICO 08’s developer, Fair Isaac Corporation, predicts it will help lenders reduce default rates on consumer loans 5 to 15%.

Fannie Mae and Freddie Mac own or guarantee almost 31 million home loans worth about $5.4 trillion, which makes it all the more important that they approve the new score model.

For more information, visit www.creditsecuritygroup.com.

Read more: http://rismedia.com/2009-09-08/is-the-new-credit-score-model-helping-home-buyers/#ixzz0QwXxVZBx