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Zywicki in New York Times: FICO May Have to Adjust Credit Scores

In today's economic market, Professor Todd Zywicki believes the effect on consumers of credit defaults may not have the same impact it would have had prior to the meltdown in the financial and housing markets.

Commenting in The New York Times, Zywicki predicted that FICO might have to adjust its credit scores to reflect greater leniency for foreclosures and other credit defaults.

"It just seems obvious that a foreclosure in 2008 or 2009 doesn't have as much information value as a foreclosure five years ago," Zywicki said. "To the extent that foreclosure doesn't predict future behavior as much as it did in the past, you'd expect that the FICO algorithm would change to adjust for that."

Thoughts on Walking Away From Your Home Loan, The New York Times, March 14, 2009. By Ron Lieber.

Excerpt:
"A short sale, deed in lieu or foreclosure itself will almost certainly damage your credit report and score, and the black mark will last for up to seven years. But the amount of damage it does will depend on how much other credit trouble you've gotten yourself into with other lenders.

"If you're giving up the home you own, you'll probably need to rent soon afterward. Will landlords turn you away once they check your credit and discover your troubled mortgage? 'If it's the only thing marring their credit, it's probably not a big issue,' said Clay Powell, the director of the Rental Property Owners Association of Michigan, who added that good tenants could be scarce in economic environments like this one.

"In fact, Todd J. Zywicki, a law professor at George Mason University, predicted that FICO may have to adjust its credit scores to lessen the impact of a foreclosure or similar incident. 'It just seems obvious that a foreclosure in 2008 or 2009 doesn't have as much information value as a foreclosure five years ago,' he said. 'To the extent that foreclosure doesn't predict future behavior as much as it did in the past, you'd expect that the FICO algorithm would change to adjust for that.'

"Craig Watts, a spokesman for FICO, said that was an interesting idea. 'We try not to get involved too much in psychobabble around what is and isn't predictive,' he said. 'If the numbers show that foreclosure is less predictive, then we'll take it into account in future redevelopments of the formula.' That would take a minimum of two to three years, though.

"Some lenders aren't waiting that long to initiate their own foreclosure destigmatization programs. The Golden 1, one of the nation's largest credit unions, now has a mortgage repair loan for people who have lost a home to foreclosure but want to buy a new one.

"It's hard to imagine that there won't be a parade of insurance companies, credit card issuers and mortgage lenders in Golden 1's wake, even though Fannie Mae and Freddie Mac may be unwilling to guarantee the mortgages of such borrowers for several years. In fact, Aaron Bresko, the vice president of lending for BECU, another large credit union based in Washington State, is putting together a panel called 'How to Lend to the Newly Credit Impaired' for a conference later this year.

"'Good people have bad things happen to them, so how do you find those people and reach out to them?' he said. 'As the year progresses, it's going to be an emerging market.'"

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