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The FICO Scores Seemed So Innocent.

Ed Andrews wasn't the sort of guy who fell into money troubles. He wasn't financially illiterate and he wasn't unemployed. He wasn't stricken ill and he wasn't drowning in credit card bills. And there was more than what he wasn't. There was what he was. A New York Times reporter. A New York Times reporter who covered the economy. A guy who interviewed Alan Greenspan and covered the spike in mortgages. Who reported on money and explored the consequences of debt.

But he was also human. And he was divorced, with heavy alimony payments. He was in love, and needed a new home. And so he applied for a mortgage. What happened next is a bit shocking. He was referred to Bob Andrews, a loan officer who "specialized" in cases like his. The response was quick, and cheering.

Bob called back the next morning. “Your credit scores are almost perfect,” he said happily. “Based on your income, you can qualify for a mortgage of about $500,000.”

What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.

“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine.”

You had to admire this muscular logic. My lenders weren’t assuming that I was an angel. They were betting that a default would be more painful to me than to them. If I wanted to take a risk, for whatever reason, they were not going to second-guess me. What mattered more than anything, Bob explained, was a person’s credit record. History seemed to show that the most important predictor of whether people defaulted on their mortgages was their “FICO” score (named after the Fair Isaac Corporation, which developed the main rating system). If you always paid your debts on time before, the theory went, you would probably keep paying on time in the future.

At this point, the story's end is pretty clear: Foreclosure. Or, at the least, pre-foreclosure. But this excerpt is worth focusing on. In the bright light of the boom, you can see how the mortgage made sense -- even to a smart guy like Ed Andrews. Bob wasn't without a theory. The FICO indicator makes a certain sort of sense. Trustworthy people are trustworthy people. Bob wasn't even without data. The relationship between FICO scores and foreclosure has a history. You can graph it. And it had the virtue of pointing down the path that both the lender and the borrower wanted to follow. Bob got his fees. Ed got his house. Another satisfied customer.

A year or two later, it all unraveled. The theory looks insane. Ed had no money. Bob had no backup plan. Hindsight can be better than 20-20. It can be X-ray. But it didn't look insane then. And it won't next time, either. It won't be FICO scores the lenders point to, of course. It'll be something else. Something more convincing. And meanwhile, there'll be a perfectly good reason for the chairman of the Federal Reserve to be keeping interest rates low, and a raft of superficially solid explanations for these weird new vehicles being used on Wall Street.

And that's what we don't know how to regulate out of existence. Plausible justifications. Excessive confidence. Convenient theories. You know the old Upton Sinclair line "it is difficult to get a man to understand something when his salary depends upon his not understanding it?" The corollary is that it's easy to get a man to believe something when his salary -- or his mortgage -- depends on him believing it. That's true even when the guy is an expert in the field.

By Ezra Klein  |  May 18, 2009; 6:06 AM ET
Categories:  Financial Crisis , Housing Crisis  
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Next: Can Menu Labeling Make Us Healthier, Cheaper, Better?


This is an interesting story and points out how the current bailout/rescue/stimulus plans seem more intended to patch up the old financial edifice that has failed us (and our two Andrewses in this story) so badly than create what Obama likes to call a "New Foundation."

But the old system has fundamental flaws. Workers in the financial industry are rewarded in a manner that is not conducive to responsible behavior, and indeed discourages such behavior in a rather heavy-handed way. Furthermore, it tends not only to reward most highly those whose actions are the most irresponsible from the point of view of any benefit to society overall, but it creates the very strange situation where those who produce no product, who create nothing of extrinsic value, who provide legitimate services to no one, and for whom their work's sole purpose is the pure satisfaction of greed are the very highest compensated individuals in our entire national workforce (with a few athletes and actors thrown into the mix).

This is absurd, and we are suffering from its effects now throughout our economy. The resentment we feel over AIG's bonuses and whatnot are not purely based on envy, but on the knowledge that such things are just plain WRONG. It is WRONG to give something for nothing, particularly when that something is given in such vast quantities.

If we merely try to patch the fissures in the "Old Foundation" with spackle, as we seem to be doing, it doesn't matter how much spackle we devote to the exercise, we will still be left with the old, bad foundation that will fail us again, perhaps even more disastrously next time.

You may ask how it could be more disastrous, after we lost so many of our financial firms and are on the brink of losing an industry as essential to our national well-being as automobile manufacture. Well, don't ask, because we really don't want to find out.

We need a new, more equitable economic system, not an old one that we've gussied up.

Posted by: FergusonFoont | May 18, 2009 6:55 AM | Report abuse

There's something else Klein touches on but doesn't quite plumb -- using an "authority" figure as cover for irresponsible spending, with a dollop of manic American optimism on top. Like too many Americans, I would know that from personal experience. (a) I know it's a bad idea, (b) I want to do it anyway, (c) a "professional" tells me I can. (b) & (c) totally trump poor little (a).

The Constant Weader at

Posted by: marieburns | May 18, 2009 6:55 AM | Report abuse

BTW, are we going to have these stupid "click to continue" links on every post here? I hope not.

Anyway, a couple with good credit scores and good jobs got a bit greedy, borrowed too much money and got into trouble, especially when one of them lost their job. It's an old story, and this isn't what we need to think about regulating. No ARM, the loan officer was honest (if too optimistic), nothing tricky about the mortgage contract, and most importantly, there's no mention of credit default swaps and derivatives and all the fancy gambling done on top of this mortgage, which is what really caused the crisis.

In fact, the basic theme of this article (apart from "please buy my book") is that we all got a little bit greedy, and this financial crisis is the price we're paying. Which is simply not the truth.

All this little story really tells us is that Times economics reporters really don't understand real-world finance; they basically serve as stenographers for Big Finance and the Chamber of Commerce. But we already knew that.

Posted by: woofer123 | May 18, 2009 7:51 AM | Report abuse

Seriously, people should know how much they can afford, and they should know how to pay their bills, etc. But so many people were conned by the banks (oh, for sure, you can afford this - or oh, don't worry, you'll be able to refi when it adjusts). No, I don't think it was fraud, I think it was people wanting to believe, when they knew darn sure it wasn't true.
There's also a whole class of people who should never have been homeowners (or really, weren't - they took out no money down loans and only paid the interest, no equity position whatsoever). Our govt likes to encourage homeownership...But the reality is NOT EVERYONE SHOULD BE OR WANTS TO BE A HOMEOWNER. AND - the govt is STILL doing it with program after program they are introducing these days that will bite them in the a**.

Posted by: atlmom1234 | May 18, 2009 8:17 AM | Report abuse

Congratulations Ezra on your new gig. woofer123 refines the issue in a such a fashion that is beyond dispute. I am able to add only one small comment. I was struck by the statement, referring to the lender, "Bob had no backup plan." Is it actually possible that the original lender still had possession of the loan two years on? The primary inducement of lenders to disregard a borrower's ability to repay is the knowledge that someone else will be stuck collecting on a default. Mortgages were very much in demand for their value as repackaged assets. Lenders became veritable clearing houses for loans to be bundled into marketable investments. The mortgage I signed was resold within a week. A co-worker saw his mortgage resold in a day. Are we to believe that the man who made the dubious loan to the Times reporter was still available to be held to account for his bad financial decision? I don't believe it.

Posted by: jaytingle | May 18, 2009 8:42 AM | Report abuse

Everyone knows that financial problems ruin marriages. Ed Andrews doesn't explore the issue fully, but his is a classic case of the reverse: romantic failure will devastate your finances.

Andrews says nothing about his first wife, except that the divorce settlement consumed almost 2/3 of his take home pay. That was his first mistake. His second was rushing headlong into his high school sweetheart, apparently without noticing her high maintenance expectations.

Still, I can hardly wait to read what Ezra's old Tapped buddy Dean Baker has to say about this. Interviewing Alan Greenspan doesn't mean squat, since Greenspan never saw the housing bubble either.

Posted by: Aatos | May 18, 2009 9:09 AM | Report abuse

Congrats on the new diggs, Ezra!!

Posted by: Calvin_Jones_and_the_13th_Apostle | May 18, 2009 9:46 AM | Report abuse

Andrews's story is interesting precisely because he and his wife are so unsympathetic. With less in combined take-home pay than I have individually, they were living an upper-class lifestyle that my spouse and I don't assume we can afford: summer rental houses, Whole Foods fancy cheeses, JCrew outfits for the kids.

We also made the mistake of buying near the top of the market, but at least we didn't buy based on an assumption that someone currently unemployed would get a secure, salaried job, and despite a hefty mortgage payment every month, we could scrape by without adding to our debt even if one person became unemployed.

While it might have made sense from a lender's perspective to do a mortgage based on FICO scores, it is utter nonsense from the borrower's perspective. The borrower KNOWS how much money he has each month and what his obligations to various dependents -- ex-wife, bio-children, new wife, stepchildren -- will cost him. The fact that you've paid all your debts on time in the past means nothing if you've made a big change in your life today.

It was dumb for lenders to rely so heavily on FICO scores, but I expect they did so partly because they assumed that people who had acted responsibly in the past would not become irresponsible in the future. I certainly have very little sympathy for someone like Andrews, who knew exactly how his mortgage broker was fudging his numbers, and who knew his entire take-home pay would be eaten by his mortgage, yet took the mortgage anyway.

God help the truly needy if someone like Andrews becomes the public image of the foreclosure crisis. Americans who might be generous in their public policy choices to those who were misled by unscrupulous lenders, or those whose credit card bills are piled with Super Wal-Mart groceries and doctor's payments, won't be so kind if they think the bulk of defaulting mortgage holders are over-extended yuppies.

Posted by: pghsm | May 18, 2009 10:57 AM | Report abuse

I think I'm going to like this new column. That being said, I do get tired of sob stories about people who over extend themselves.

When I built my first house 10 years ago, I bought a house that was about 200k below what they offered to qualify me for. Now that I am building my second house, I am building a house that is 300k under what they are offering to qualify me for.

People should be responsible for doing the math themselves at not trusting what a salesperson is telling them. That said, the government should also analyze lender performance and implement ways to punish those with high rates of bad loans along with providing easy to understand and quick to read handouts on how to figure out what you can really afford.

I don't use any credit cards either. It is a hard transition to get them out of your life, but it is worth it and more people should be advised to take that approach. The problem with this though is that FICO punishes my credit score for not having credit cards even though I keep my finances in order.

The FICO system needs to be fixed to not judge you based on your past history, but onn your capacity going forward. That would definitely be a welcome change to the system.

Posted by: captclamdigger | May 18, 2009 12:04 PM | Report abuse

"While it might have made sense from a lender's perspective to do a mortgage based on FICO scores, it is utter nonsense from the borrower's perspective."

Offering loans that are utter nonsense from the borrowers perspective would be utter nonsense from the lender's perspective, in a well designed financial system. That is, if a bank originated the loan and were likely to hold it to maturity, they would have a very strong incentive not to grant loans that are nonsense from the borrower's perspective.

With is why securitization of mortgages is such an insidious danger ... it may be reasonable safe so long as bankers act like bankers, but once they start acting like used car salesmen, it exposes the economy to substantially higher systemic risks.

Posted by: BruceMcF | May 18, 2009 12:46 PM | Report abuse

I think woofer123 has already implicitly answered captclamdigger's plaint about the individual sob stories.

If we just had the usual frequency of individuals making bad decisions, getting overextended, and getting into real trouble as a result, we wouldn't have a crisis.

The reason why we had **a lot more people than usual** doing so is that, as woofer points out, the financial 'industry' generated a lot of powerful incentives to entice people into making those bad decisions. It didn't just happen by dint of a collective moral breakdown on the part of homeowners and homebuyers.

Posted by: rt42 | May 18, 2009 1:08 PM | Report abuse

Off-topic and in re FICO scores, I hate Fair Isaac with a white-hot passion. See, I am the canonical opposite of Ed: I have never been in debt, I have a year's worth of after-tax salary in cash (maybe more, but not much more), and my FICO score is bad. Well, not bad bad, but not perfect the way it should be. It isn't perfect because I don't borrow money (since I don't need to), and if you don't, FICO marks you down. Quite a bit, it turns out.

Personally, I think Fair Isaac needs to be a regulated utility.

Posted by: wcwhiner | May 18, 2009 4:08 PM | Report abuse

I'm with pghsm. Ed Andrews was delusional, reckless and foolish. Of course Bob had no backup plan - he didn't need one, the loan was sold to another company by that time.
It was always insane.

My FICO score and income qualify me for an $800k loan, even now. I can afford maybe $300k. I'm not a New York Times reporter, but I can add and subtract well enough to figure out that the lenders are insane, and refuse their money.

Posted by: DougK1 | May 18, 2009 7:17 PM | Report abuse

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