I work for a really large mortgage company, and as I watch the news of late about defaults rising and home sales stagnating and subprime lending cease as we've known it, I have a judgment, and then suggestions.
I think the means by which we measure a person's credit rating is broken. We use this thing called a FICO score, which is managed by the companies Experian, Equifax, and Transunion. Frankly, they do a lousy job. A review of anyone's credit report will generally find inaccuracies, redundant entries, and in my view, an incomplete picture. In the year 2007, it seems to me that there's a better way. Technology allows for that, and a person's FICO score is the backbone of individual financial prowess. Something so important shouldn't be so carelessly managed. Indeed, a cottage industry has sprung up to help people monitor their credit report.
1) Vendors today who wish to sell goods in the marketplace have to get a barcode. It doesn't cost a lot of money to get one, and it does a good job of making each item in a store unique and easily traceable. Why don't vendors who bill anything that might appear on our credit report get a unique ID to easily identify and trace them, and then whenever an item appears on our credit, it shows the vendor's unique ID and our account number with that vendor. That should get rid of the problem of duplicate entries.
2) Why do we have a single FICO score? That's dumb. All that any vendor cares about at the end of the day is that a consumer pays the money they owe. If you get a loan, make your payments. If you have a credit card, make your payments. If you go to the doctor, pay the bill. That's all they care about.
But here's the truth: how a person performs in paying off their house has no relevance at all to how they pay their dentist.
So why do mortgage lenders take into account how a person pays the dentist when sizing up their ability to make a mortgage payment?
Answer: because it's the only system we have.
Subanswer: maybe because it allows them to charge more money for the loan in interest.
But in a time of tightening credit and better technology, the market will find a way around this. People still need homes.
I think there should be three tiers of credit scoring.
Tier #1 is your home. It's either your rent or your house payment. Rent isn't tracked like a house payment, but it should be. It indicates how you would pay for a home loan. I think that utility bills should also be stacked up in this tier. You're more of a risk of not paying your home loan as expected if you let the lights go out.
Tier #2 is voluntary credit. Credit cards, student loans, car loans - anything where you fill out an application and apply for credit with a vendor.
Tier #3 is involuntary credit. Doctor and medical bills, parking fines, library late fees that you forget to pay. You didn't seek out these bills - they just happened to you.
This is a more complete picture of how we pay our bills. When getting credit, let's compare apples to apples. I also think that a better system would greatly speed up the mortgage process. Many lenders today - especially those who do/did subprime lending - waste time looking at the merge of the Experian-Equifax-Transunion credit report. If credit scoring was split into three tiers, there would be no need for that. And for those that have never applied for a home loan, their rental history provides the information and is demonstrated through their Tier 1 scoring. That doesn't happen today.
That's my two cents...