dlaw

The Smoking Gun of the Credit Crisis: FICO

The thing I do blame Fannie and Freddie for is not taking the AUS data and having it analyzed with sophistication. There should have been logs of multiple logins, changes in info, and data that did not fit statistical norms.

The Smoking Gun of the Credit Crisis: FICO

Gemonk, You still have to account for the fact that Fannie and Freddie have LOWER default rates than the private banks. LOWER.

Here's a quote from an industry group about the new Desktop Underwriter 7.0:

"Stop fraud
Other changes are intended to deter fraud. For example, during the boom times, brokers were known to submit a borrower's application repeatedly, fudging the debt and income numbers each time, until Desktop Underwriter granted an approval. DU 7.0 is believed to limit the number of times that the financial figures on an application can be changed; after that, the application is locked out, similar to the way an ATM will reject your card if you enter the wrong PIN multiple times"

In other words, brokers were gaming the system.

And Gemonk, it is not as if a bank is IN ANY WAY required to lend just because Desktop Underwriter says it's okay. DU does not suddenly take the money out of a bank's Federal Reserve account and do an instant closing. It's a tool - one that was badly, badly misused.


On Nov 20 05:46 PM gemonk wrote:

> I have been a mortgage underwriter for many years. FICO is a big
> issue, but even more so is AUS - the automated underwriting sysytems
> used by the GSEs. Fannie uses Desktop Underwriter (DU), Freddie
> uses Loan Prospector (LP), and others have their own in-house systems
> modelled on the GSEs.
>
> Once the AUS made a buy decision, it was virtually impossible to
> overturn, even if you knew there was something not right about the
> findings. Between 2000 and 2006, underwriting standards became slacker
> and slacker, and a higher and higher proportion of loans were approved
> by AUS.
>
> I also underwrote sub-primes for the wall street investors. They
> did not ever want to hear "this is not a good loan". they bought
> all this trash knowing it was trash - "the model accounts for fraud
> and lower credit quality" they said repeatedly. Whistling past the
> graveyard...

The Smoking Gun of the Credit Crisis: FICO

Thanks for the comment.

FICO over-predicted and, of course, FICO under-predicted default rates. And yet FICO was totally trusted as the underpinning to all the major securitization markets.

No wonder we have a problem and no wonder our paper is not trusted.