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.