I am retired and take educated guesses on all things financial.

September 13, 2009

September 13, 2009: New Credit Scores Will Help Homebuyers

Does anyone remember how several States improved their student achievement test scores? Dilute the measurements to obfuscate the result, they did. And no one was the wiser.

Now, a new and improved FICO scoring scheme will allow more individuals access to refinancing their present home or buying a new one. The developer, Fair Isaac Corporation, predicts this new analysis instrument will help lenders reduce default rates on consumer loans from 5 to 15 per cent. One hangup - Fannie Mae and Freddie Mac have yet to approve the new credit score tool. Until they do, the traditional model scores will suffice.

Fair Isaac believes this new system will be a great boost to the housing market. The system takes into account the borrower's history and penalizes them less for a single "unusual" event. It also has more score card levels, allowing for finer adjustment of the credit score. It will also likely reduce the power of collection agencies since a single event will have less significance to the borrower who had that problem.

I believe that current scores, if followed, are plenty liberal to validate one's propensity to pay back a debt.

That said, if the new system is approved by the big boys, plan on a nice bump up in home sales and credit access. Hopefully, we are not planting the seeds for another credit bust down the road.