FICO's Credit Score Change will Cause Mortgage Industry to "Crumble"

I had a fascinating call with a mortgage broker from Alabama yesterday afternoon. He had seen our blog posts and articles about the recent FICO decision to no longer count authorized user accounts and wanted to learn more. 

By the end of our 20 minute call, the mortgage broker was feeling pretty bleak about the impact this change would have on his industry. "The mortgage industry is going to crumble. Just fall apart," was his exact quote.

Authorized user accounts have been a favorite trick of mortgage brokers for some time. If a potential client doesn't have a high enough credit score, they'll often advise the client to have some one with good credit add them to an established account as an authorized user. Once the new account appears on their credit report (usually within a few weeks), their credit score can increase. In the event of someone with no score or a very low score, the increase could be significant. Voila! Instant credit improvement and a better loan candidate.

A case could be made for this use of authorized user accounts being fraudulent. Sure, it's not as bad as the credit repair companies that sell piggybacking services for thousands of dollars, but it is still a misrepresentation of the client's real credit data. I'm sure there are some borrowers who got artificially low rates or loan deals based on this "instant" credit fix.

Fair Isaac has stated that this credit scoring algorithm change was designed to protect lenders from fraud. And by stopping brokers from recommending authorized user accounts, I suppose they are. But to an already ailing subprime mortgage industry, this change may just be another nail in the coffin.

What do you think will be the impact of the FICO score change on the mortgage industry? Did you use an authorized user account to boost your credit before a mortgage application? Share your feedback in the comments section below.

Comments

What is unclear is when/what the FICO changes affect.

If a person who signed up for a 3 year adjustable ARM by using the "authorized user" method to boost his score say two years ago from 600 to 700 then where does that leave him now?

Will his FICO drop from 700 to 600 once the changes are made?

If so then his ARM will shoot through the roof thus crumbling the mortgage industry.

If everyone is "grandfathered" in with the score they have now then it's not too bad.

[EmilyPeters]

It shouldn't impact the customer unless they decide to refinance their mortgage.

If the borrower sticks with their ARM, their modified credit score will not impact the existing mortgage.

If they try to refinance into a new loan, the lender will pull their credit score (likely with the new FICO formula) and the borrower may have to face higher rates due to a lower score.

With the majority of ARM resets coming up in the next few months, it sounds like a lot will depend on the interest rates people are dealt.

[mike]

Just wait ans see what this perfect storm from the credit industry does to the enonomy. It will have a devastating effect on families that have depended on this use of credit for years! It is an insult to read that they )FICO) just found out about this last year. It hsa been around for as many years as I have been using it 30_+ years. This is an insult to the American economic system. Credit card companies and lenders make BILLIONS form this. What until the "gau community hears about this. This will be just another thing that will be taken away from them, making their life even more difficult than it is now. This is the tip ofthe iceberg...

[Nancy Castleman]

I heard a fascinating segment on NPR last night about how some people are selling their good credit in exchange for letting others be authorized users on their accounts. My guess is that FICO is about to put this "cottage industry," as NPR called it, out of business! You can listen to the segment or read about it here: http://www.npr.org/templates/story/story.php?storyId=11022541