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New Credit-scoring System Will Affect Mortgage Demand

FICO Credit Scores Change
There’s a new FICO rating process that everyone will have to contend with.

Fair Isaac Corp.’s FICO scoring system is getting a makeover. The plan to change the existing model, dubbed as FICO 08, has been circulating in the media a year ago but it’s only now that the new rules will be formalized. It will only be adopted though come September this year.

The FICO score helps determine everything from the interest rates on a person’s credit cards to his potential of getting hired in a certain company. It must be remembered that FICO scores have been trusted by majority of the country’s largest banks in determining their borrowers’ capacity to pay their loans. However, as hybrid and exotic mortgages were introduced during the real estate boom, Fair Isaac found itself troubled with the changes in the mortgage landscape. Since then, FICO’s accuracy became a heated debate among borrowers and financial experts alike.

After receiving complaints from the National Association of Mortgage Brokers about the abuse in “piggybacking” in credit, the company has agreed to put a halt to this practice. Credit-repair companies have proliferated in the country by acting as middle men by allowing those with bad credit histories to become authorized users of accounts of those with better credit. They can use the account and take advantage of the other’s impressive reputation. For a service fee, companies can help those in dire need of a loan to boost their credit scores by up to 100 points. Some are even upgraded from a median score to an excellent credit of at least 800 just because they’ve ridden on another’s sterling loan history. This practice has been abused by subprime borrowers that lenders and banks have lost track of screening those who are eligible and not eligible for a loan.

In a report by The Wall Street Journal, “When scoring a consumer, FICO 08 won’t take into consideration credit-card accounts for which that person is an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score.” Other modifications in the scoring system include more detailed scavenging of a person’s financial transactions, provision of a higher score to a subprime borrower who has other loans in good standing than a borrower also in the same category but remains delinquent in all of his loans, and the creation four more segments for borrowers who fall into good or bad borrowers compared to the previous groupings.

The intention of the scoring modification is a good one. Many lenders have tightened their standards not only because of the rising unemployment cases in the country but also because more borrowers have fallen into the subprime category. But like it or not, the real estate industry will surely be affected. First, many borrowers will find it harder to obtain a loan since credit scores will plunge even more this time. This is unfair to those with already good credit standings but happen to be authorized users of another account. Second, credit history won’t still include rent payments because not all landlords take time to declare these transactions. It could be a seminal component in Fair Isaac’s formula other than the determination of loans and bills payments.

Because of this, we should expect a more difficult time for borrowers but then again, it would reduce the risk of granting subprime borrowers who are already troubled by their revolving accounts.

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