This seems to be the question that many in the banking industry are mulling over as defaults and deficiencies mount in all branches of financing world. The FICO credit score has been the industry standard for years,  utilized for almost every lending decision, and these have been based substantially on the applicant having what is deemed to be an acceptable credit score. But if acceptable FICO scores did nothing to prevent the sub-prime crisis, many people in the banking world– not to mention Main Street– are wondering what good they are, anyway…

Of course if you ask the FICO score’s creator, Fair Isaac, you will most certainly get a lengthy dissertation of it’s merits including the promise of accurate prediction of risk of a borrower’s defaulting — but also a disclaimer that certain aspects relevant to the current housing/economic crisis are outside the scope of the score, such as the downward trajectory of property values, increased unemployment, etc.  Not to mention, says Tom Quinn, Fair Isaac’s Vice President of global scoring, it is the lenders themselves who make the decision what score represents acceptable risk.

The subprime mortgage sector came to fruition in the 1990’s with a the target clientele designed to be those with lower credit scores. A score of 620 was considered the industry standard for government agency-underwritten mortgages at that time.  There are many industry experts that feel that the reduction of the credit score standards is one of the major factors for the huge numbers of foreclosures that are occurring today. Even the CEO of the New York hedge fund Second Curve Capital, Tom Brown, recently remarked in a presentation at a Banking Industry sponsored Retail Delivery show that Fannie and Freddie progressively lowered the FICOs required on the mortgages the agencies bought.

So what are the alternatives? Will the new FICO 08 scoring system make any difference? Time may or may not tell, but regardless of the answer, the bottom line seems to be the need to return to sound, traditional lending practices.

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