As "Housing Recovery" Fizzles A New Scheme Emerges: Boost FICO Scores By Changing The Definition

Tyler Durden's picture


Now that the the fourth dead cat bounce in US housing since the Lehman crisis is rapidly fading, and laundered Chinese "hot money" transfers into US luxury real estate no longer provides a firm base to the ultra-luxury segment, the US government is scrambling to find ways to boost that all important - and missing - aspect of any US recovery: the housing market. This is further amplified by the recent admission by the Fed that it is in fact encouraging asset bubbles, not only in stocks but certainly in all assets, such as houses. Well, the government may have just stumbled on the solution to kick the can yet again and force yet another credit-driven housing bubble, a solution so simple we are shocked some bureaucrat didn't think of it earlier: changing the definition of the all important FICO score, the most important number at the base of every mortgage application.

First, a tangent.

Recall that as we reported last week, a shocking 77 million Americans currently face debt collectors, a number that previously had received no prominence because credit card companies report delinquency numbers, not the number that is "what happens next" after a delinquency is charged off and goes to the repo man. Sure enough, as delinquencies have been declining over the past several years - a widely trumpeted phenomenon to boost confidence in the recoveryless recovery - collection numbers were never mentioned as the realization that 77 million Americans effectively have zero access to credit because of (partial) defaults, they are no longer seen as eligible debtors.

Well, not any more. According to the WSJ, in what is a desperate attempt to boost the pool of eligible, credit-worthy mortgage recipients, Fair Isaac, the company behind the crucial FICO score that determines every consumer's credit rating, "will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency."

In doing so, it will "make it easier for tens of millions of Americans to get loans."

How many millions?

As of July, about 64.3 million consumers in the U.S. had a medical collection on their credit report, according to data from credit bureau Experian. And of the 106.5 million consumers with a collection on their report, 9.4 million had no balance—and won't be penalized under the new credit-score system.

Because nothing says a stable recovery like picking at lowest hanging fruit - changing the definition of an eligible creditor - to prove the point. 

The impact won't be long in coming: "The changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores. "It expands banks' ability to make loans for people who might not have qualified and to offer a lower price [for others]," said Nessa Feddis, senior vice president of consumer protection and payments at the American Bankers Association, a trade group."

Perhaps the thinking goes that if you have defaulted once, you have learned your lesson and will never do it again. Then again, that thinking is patently wrong but who cares: there is a housing bubble to reflate at all costs, even if it means giving out Jumbo non-conforming loans to deadbeat recidivists.

Some critics said that loosening standards could bring losses for borrowers and lenders. "A lot of people really just can't handle credit—you're not really helping them by allowing them to dig themselves into debt," said Howard Strong, a lawyer in Tarzana, Calif., who specializes in consumer-protection class-action lawsuits. "It's like a sharp knife—if you don't know how to use it, you can cut yourself."

Perhaps someone should tell that to the US Treasury?

Some experts said the new model for FICO scores walks a fine line: It loosens standards without overstating the creditworthiness of borrowers. Fair Isaac said it ran studies to determine how likely borrowers are to repay their debts if they had a stellar credit record with the exception of such collections.

Did they hire Moody's as a consultant for these studies perhaps?

Finally, and tying it all together, is the source of America's chronic debt collection problems:

More than half of all debt-collection activity on consumers' credit reports comes from medical bills, according to the Federal Reserve. Such activity results in lower credit scores for consumers, meaning that lenders are more likely to be cautious in extending credit.


The number of U.S. consumers struggling with medical debt has been surging. As of 2012, 41% of U.S. adults, or 75 million people, had trouble paying medical bills, up from 58 million in 2005, according to a report released last year by the Commonwealth Fund.


The CFPB, in a May report, criticized credit-scoring models used by the financial industry, saying they put too much emphasis on unpaid medical debt and lead to an overly negative view of consumers. CFPB officials say that medical debt is inherently different from other forms of debt because consumers are often unaware of what they owe to hospitals and doctors.

Oh wait, maybe this explains why Obama is so desperate to socialize medicine: because nobody is actually paying. Suddenly it all falls into place.

Finally, as to the practical implication of this change...

The impact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers' credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points, said Mr. Ulzheimer.


The lower weight given to unpaid medical debt could increase some affected borrowers' FICO scores by 25 points, said Mr. Sprauve.

Because the only thing better than GAAP FICO scores is non-GAAP FICO. And now, cue the increasingly sad, laughable and pathetic all-in "recovery" one last time.

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Fri, 08/08/2014 - 11:22 | 5065379 IANAE
IANAE's picture

... pulling out all the stops to stimulate moar consumer debt ... GREAT for business - until it isn't.

Fri, 08/08/2014 - 11:25 | 5065400 Captain Benny
Captain Benny's picture

Fair Isaacs has learned Newspeak!!!

Fri, 08/08/2014 - 11:31 | 5065427 NoDebt
NoDebt's picture

Somehow, "this will not end well" just doesn't seem to cover it.

I am seriously considering changing my name to LoadOfDebt and running every possible credit line I have access to straight to the moon.  This shit's all gonna get written off either directly by the government or through hyperinflation someday.

And besides, I could do with a new Maserati and some plastic surgery.  Maybe a new wife, or at least a couple girl friends.

Fri, 08/08/2014 - 11:44 | 5065493 Postal
Postal's picture

Stick with girlfriends--and make it clear they're not exclusive.

Wives are too damn demanding. That, and the whole jealous thing.

Fri, 08/08/2014 - 11:46 | 5065507 Harbanger
Harbanger's picture

Not to mention you'd have to be broke or crazy to marry without a solid prenup.

Fri, 08/08/2014 - 11:54 | 5065539 mvsjcl
mvsjcl's picture

"Perhaps the thinking goes that if you have defaulted once, you have learned your lesson and will never do it again."


That's like the bank saying, we've paid our fine (for illegal behavior) once, so we won't do it again.

Fri, 08/08/2014 - 12:10 | 5065609 cocoablini
cocoablini's picture

Just remember- the financial system is based on an accounting scheme. So when economics works against you,change the scheme. Economics is fantastic because it has no basis in real math. Math is used to define a world opposed to being implemented to understand the world. Sad

Mon, 08/11/2014 - 07:41 | 5075494 Thomas
Thomas's picture

Be careful in interpreting this data folks. My family (a) always pays its bills (like Lanisters), (b) has excellent (by comparisons) health insurance, (c) processes a shitload of medical bills (where is the lemon law for marriage?), and (d) is fairly frequently getting calls from debt collectors because of poor coordination among billers and payers. By the time insurance pays the bill, we are in collection. We learned to just wait for the dust to settle, the insurance company to pick up its tab, and then pay the part we owe. 

Fri, 08/08/2014 - 12:54 | 5065887 misterb4096
misterb4096's picture

Who needs a prenup? Bitch can't get my phizz at the bottom of the lake nor my BTC...

Fri, 08/08/2014 - 16:53 | 5067447 PlausibleDenial
PlausibleDenial's picture

Prenups are only fodder for the lawyers to receive more of your dollars in the process of identifying, defining, and enforcing said prenups.  "Own nothing, control everything" Rockefellar...

Re:  The subject at discussion.  FICO scores could not have been relevant after the mass financial scam that has occurred over the last number of years.  But, what do I "no",  I am sure there are some statistic heads on here that must know about data skews, etc.





Fri, 08/08/2014 - 21:17 | 5068505 TheRedScourge
TheRedScourge's picture

In many places, there is no such thing.

Fri, 08/08/2014 - 12:50 | 5065852 RafterManFMJ
RafterManFMJ's picture

No Debt, if you bought yourself a nice set of tits you'd never have to leave home!


Fri, 08/08/2014 - 14:07 | 5066432 NoDebt
NoDebt's picture

"Not that there's anything wrong with that."

I'll take it under advisement.

Fri, 08/08/2014 - 14:10 | 5066469 RafterManFMJ
RafterManFMJ's picture

An entire post comprised of Pop Culture references? *hat, doffed*

Fri, 08/08/2014 - 21:42 | 5068584 TheReplacement
TheReplacement's picture

Invest:  Lever yourself some gold and silver.

Trade:  BTFD on days when the market goes down because of good news (as opposed to end of the world news). 

I was taught to bet in pool (8 or 9 ball) by taking the entire amount you are willing to gamble and dividing it by the number of games you would like to play.  $100 dollars/10 games=$10s a game.  Each $10 is a barrel.  Play the market with the barrel approach.  Never exceed your commitment so you only lose what you can afford.  Take cash out when you win and tuck that into real assets. 

The market is very predictable now.  Long the most shorted is a good bet.  Short gold on up ticks.  Just risk a barrel at a time and turn wins into real things.

Fri, 08/08/2014 - 11:30 | 5065428 Pladizow
Pladizow's picture

Well Yeah, the hedge funds need to unload overpriced inventory to someone before the collapse!

Sat, 08/09/2014 - 07:53 | 5069348 Mr. Ed
Mr. Ed's picture

Yeah.  You got the idea!

Fri, 08/08/2014 - 12:09 | 5065604 midtowng
midtowng's picture

This is great news! You can't burst a credit bubble until you've sucked in all the junk-level consumers

Fri, 08/08/2014 - 11:37 | 5065467 Harbanger
Harbanger's picture

I've been saying this for at least 3 years.  They will reinflate the housing bubble again with subprime mortages.

Fri, 08/08/2014 - 11:48 | 5065515 NotApplicable
NotApplicable's picture

Until they unwind the "Anti-Money-Laundering Act" it won't mean shit, as they demand a paper trail (via bank statement) for everything.
Because as we all know, only ebil terrerests pay with cash.

Fri, 08/08/2014 - 11:51 | 5065530 Harbanger
Harbanger's picture

Two different markets.  What they are reinflating is the low end market by qualifying new suckers.  Not where people buy with cash.

Fri, 08/08/2014 - 12:54 | 5065878 NotApplicable
NotApplicable's picture

Sorry, I worded the ending poorly, as that's not what I'm talking about. Lenders are scared to death of running afoul of that law, and will NOT lend to anyone who cannot document all transactions like rent, utility bills, etc.

All cash sales, if you recall are EXEMPT from this law, thanks to NAR.

Fri, 08/08/2014 - 11:38 | 5065468 williambanzai7
williambanzai7's picture

Fri, 08/08/2014 - 12:45 | 5065816 Rusty Nayle
Rusty Nayle's picture


Fri, 08/08/2014 - 11:39 | 5065478 yrad
yrad's picture

I think this is a good idea. Reporting a paid debt for 7 years after it has been settled is pointless. Did I mention I'm a Loan Officer for a major bank? :)

Fri, 08/08/2014 - 11:43 | 5065494 Atomizer
Atomizer's picture

You might want to look at the 7 year Treasury. It is barometer of the housing market. 

Fri, 08/08/2014 - 11:46 | 5065512 yrad
yrad's picture

The 10 year is a better barometer for the short-term thinking person, which I am. Make it, stack it, hide it.

Fri, 08/08/2014 - 13:02 | 5065935 Jumbotron
Jumbotron's picture


Great....just fucking great.

Fri, 08/08/2014 - 11:22 | 5065385 Stanley Kubrick
Stanley Kubrick's picture

Truth stretched to new fit MOAR lending agenda.

Moral of the story, kids:  only a SUCKA play by the rules....

Fri, 08/08/2014 - 11:26 | 5065410 Winston Churchill
Winston Churchill's picture

What are these 'rules' you mention ?

Is it similar to laws.

Only the " law of the jungle " has been enforced since 2008.

We are way beyond rules.

Fri, 08/08/2014 - 11:27 | 5065411 IANAE
IANAE's picture

... there's always the (ever narrowing) BK debt put for those who just can't help themselves... but that's not so good for lenders who haven't ratcheted up their ALLL to reflect the new normal lending rules... wait, this is all bullish, right?

Fri, 08/08/2014 - 11:24 | 5065395 carbonmutant
carbonmutant's picture

It's important to provide those searching for El Norte with the opportunity to invest...

Fri, 08/08/2014 - 11:26 | 5065403 the grateful un...
the grateful unemployed's picture

in the spirit of fairness why shouldn't average americans have the same access to easy credit that wall street has? if you can't drop money out of a helicopter you can sure drop credit vouchers.  and are you any worse off at the end of the day, you lost the house you couldn't afford. the stock market goes back to where it was before the rally, everyone had a good time.

Fri, 08/08/2014 - 11:33 | 5065443 NoDebt
NoDebt's picture

That's a great idea.  You should run for office.  Or at least drop your resume off at the Marriner-Eccles building.

Fri, 08/08/2014 - 11:50 | 5065527 r00t61
r00t61's picture

I'm almost inclined to agree.  When civilization has become this backwards-bizarro, perhaps the only solution is to proceed on the assumption that infinite wrongs = new utopia.

Fri, 08/08/2014 - 13:59 | 5066369 Postal
Postal's picture

infinite wrongs = new utopia

I agree. Doing an infinite amout of wrong things with ropes and whips is utopia indeed. ;)

Fri, 08/08/2014 - 20:54 | 5068424 oooBooo
oooBooo's picture

I want my own fractional reserve bank, with one customer, me. I will then put my savings in my bank and then loan myself money at my terms. If the multipler there isn't enough I get access to borrow from the fed at zero percent if I need to.



Fri, 08/08/2014 - 21:55 | 5068625 Semi-employed W...
Semi-employed White Guy's picture

I want one of those too!  But I guess you have be named Israel Goldstein or Saul Ratzenberg or something to get that kind of deal.

Fri, 08/08/2014 - 11:26 | 5065405 ebworthen
ebworthen's picture

What we are facing is not an economic crisis but a psychological crisis of societal/civilization proportions.

Fri, 08/08/2014 - 11:27 | 5065406 Smegley Wanxalot
Smegley Wanxalot's picture

So does this mean I qualify to get that used 1970s Winnebago I always dreamed of living in from Wormwood Motors And Fine Homes now?

Fri, 08/08/2014 - 11:27 | 5065409 pods
pods's picture

Fuck em, avoid debt.  Cocksuckers give you the rope and directions and you fashion your own noose so they can hang you.

"Protect your credit score."  Fucking garbage. 

Blow the system up because that "credit rating" is not used for even employment.  

Another "just the tip" scams.


Fri, 08/08/2014 - 11:36 | 5065460 greatbeard
greatbeard's picture

>> "Protect your credit score."  Fucking garbage.

When I bailed I had a near perfect credit score.  Not so much because I cared, it was just a result of how I lived my life anyway.  Borrow little, own a lot, pay bills when they arrive in the mail, lot's of cash in the bank.  I could borrow more than I could ever want by just asking.

Now I have a credit score of, errrr, zero.  I no longer have findable records.  I even have to provide a deposit to my power co-op, something reserved, usually, for know scofflaws.  My big offense? No debts, no credit, pay cash for everything, including my real estate.  I pay no taxes.

I'd never go back to an 825+ credit score.  Fuck 'em.



Fri, 08/08/2014 - 11:40 | 5065483 NoDebt
NoDebt's picture

" I no longer have findable records."

You and I need to sit down over a few drinks someday.  I need to know how you did that little piece of magic.

Fri, 08/08/2014 - 12:19 | 5065646 Hippocratic Oaf
Hippocratic Oaf's picture

Try doing that shit up here in N. Jersey.

Even IF you paid off your mtg., you're still paying taxes out the ass.

And if you drive ANYWHERE, ezpass stores your info.

You can't hide up in here.

Fri, 08/08/2014 - 12:35 | 5065705 toady
toady's picture

Yeah, I'm leaning towards you can't do that shit anywhere. Not that I'm calling bullshit, just that I'm sure some entity has some shit on EVERYONE.

Fri, 08/08/2014 - 12:43 | 5065796 greatbeard
greatbeard's picture

>>  you can't do that shit anywhere.

Findable records afa credit score, credit ratings go.  Sorry it it was taken for more than I meant.  Of course I exist in the system, I just no longer a have any credit rating and I don't give a fuck if I ever do again.

Fri, 08/08/2014 - 13:32 | 5066143 Intoxicologist
Intoxicologist's picture

Like you, I too removed myself from the credit system. Canceled all credit cards, no car payment, no nothing. I've got a medical judgment against me as well. I still have a mortgage, however. I figured my credit score was in the crapper, so imagine my surprise a few weeks ago when I learned it was in the high 700's. That just doesn't make any sense to me.

Fri, 08/08/2014 - 11:29 | 5065417 Dr. Engali
Dr. Engali's picture

More than half of a consumer's debt collection comes from medical bills? WTF? I thought Zerocare fixed that problem. Go figure..

Fri, 08/08/2014 - 11:43 | 5065497 NoDebt
NoDebt's picture

The problem is the evil insurance companies he was forced to work with.  They're the ones making the system unworkable.  Obamacare would work perfectly if it wasn't for private-sector companies being involved.  Damned private sector.

Fri, 08/08/2014 - 13:38 | 5066180 toady
toady's picture


Health insurance companies are nothing but scams. Middleman playing both sides against each other.

The problem is their scam is highly lucrative, up around 20% of GDP, so taking them out becomes another TBTF situation.

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