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I wrote a story recently in the print edition of BusinessWeek on a topic that I thought had been largely ignored in all of the coverage of the mortgage mess: The degree to which mortgage lenders, and the Wall Street firms that bundled mortgages into bond-like securities, replied on FICO and other credit scoring systems in their underwriting process. You can read the story by clicking here.
The story generated a fair bit of feedback from readers, as you’ll see in the comments at the bottom of the story. I was struck by the degree to which readers lambasted me and my partner in the project, Aaron Pressman, for blaming FICO and, with it, absolving the banks of any responsibility for making bad loans. That wasn’t my intent.
Granted, we point out in the article that FICO has its flaws, it can be "gamed" by unscrupulous mortgage brokers and self-styled "credit doctors," and its creator, Fair Isaac, hadn't overhauled the scoring system to keep pace with the innovation in the mortgage business.
But we also intended to show how banks and other lenders were using a scoring system in a manner for which it wasn't originally intended. In other words, relying so heavily on FICO was a mistake to begin with. But readers didn't see it that way. They felt we were simply swallowing the banks' line that FICO wasn't all that Fair Isaac promoted it to be, and the banks were wronged. Didn't intend it that way. But read the story and tell me what you think, either on this blog or the "comments" section of the original article.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.