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.
May 18, 2009; 6:06 AM ET
Categories: Financial Crisis , Housing Crisis
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