A new narrative of the subprime mortgage crisis

[Hazir]

I think everyone acknowledges that there are flaws with the way credit scoring works - it has some perverse incentives and definitely misses a lot of people who would be great credit risks but have lowish credit scores. But I think there's a decent defense of them as well: if one has a thin credit history, it's hard to determine based on objective data if you are a good credit risk. If you want a widely usable metric, you need to base it on something, and credit history is a fairly reasonable start.

Except when it obviously isn't. Ten years ago I could not easily find financing to buy a house with funds to make a down payment of 2/3 of the purchase price and having a secure job that paid me enough to be able to afford monthly payments. In the end I got a loan which I paid off in 6 years with a Belgian bank trying to build a customer base in the Netherlands. My biggest crimes were having no mortgage on my old home and no debts whatsoever. Not even as little as an overdraft facility on my checking account.

[wiggin]

Except when it obviously isn't. Ten years ago I could not easily find financing to buy a house with funds to make a down payment of 2/3 of the purchase price and having a secure job that paid me enough to be able to afford monthly payments. In the end I got a loan which I paid off in 6 years with a Belgian bank trying to build a customer base in the Netherlands. My biggest crimes were having no mortgage on my old home and no debts whatsoever. Not even as little as an overdraft facility on my checking account.

You do realize that lenders had essentially zero information about your willingness to pay back loans promptly and in full. Sure, you could have showed them your paycheck and argued that it would be easy for you to cover the loan, but that merely answers the question of whether it's in your capacity to pay it back, not whether you actually will.

Credit scores are not panaceas, nor do they pretend to be. But they're right in arguing that they can't assign a meaningful credit score to someone with little to no credit history; what they're measuring requires data.

[Hazir]

You do realize that lenders had essentially zero information about your willingness to pay back loans promptly and in full. Sure, you could have showed them your paycheck and argued that it would be easy for you to cover the loan, but that merely answers the question of whether it's in your capacity to pay it back, not whether you actually will.

Credit scores are not panaceas, nor do they pretend to be. But they're right in arguing that they can't assign a meaningful credit score to someone with little to no credit history; what they're measuring requires data.

Actually they knew they would get a lien on a house they could have sold right from under me in case I showed any unwillingness to pay back my loan. A house that wat worth around 200% of the loan they were going to give me. A gold plated security in a market where virtually nobody defaults on his mortgage payments. A bit of common sense goes a long way.

[GGT]

I think everyone acknowledges that there are flaws with the way credit scoring works - it has some perverse incentives and definitely misses a lot of people who would be great credit risks but have lowish credit scores. But I think there's a decent defense of them as well: if one has a thin credit history, it's hard to determine based on objective data if you are a good credit risk. If you want a widely usable metric, you need to base it on something, and credit history is a fairly reasonable start.

...Credit scores are not panaceas, nor do they pretend to be. But they're right in arguing that they can't assign a meaningful credit score to someone with little to no credit history; what they're measuring requires data.

But we are not the credit rating agencies' clients -- the banks are. They use our 'data' to make profitable loans; we are the commodity, but we don't have any choice or input or control (see Equifax).

And don't forget that institutional credit rating agencies (like Moody's and S & P) used 'reasonable metrics' to give AAA bond ratings to banks (and SIFIs) that imploded after the CDO/MBS debacle blew up, and led to the financial crisis/great recession. And then there's Wells Fargo, which should be bankrupt and out of business by now....

I don't have too much faith in credit scores, or the banks that use computer algorithms to reject borrowers straight away. Their history of epic failures is a 'reasonable metric' for my skepticism.