I’ve often thought about the similarities between the “subprime default” issue and the what the S&Ls went through in the 1980s.
Back then, a key component of the failures were the inflated appraisals that loan officers solicited and accepted to justify their loans. Today, the appraisal industry has vastly higher standards although I’m sure we’ve all heard of appraisers who’ve felt pressured into delivering specific valuations, or lose future business.
Today, credit reporting and rating agencies take the place of appraisers. A FICO score really doesn’t tell much about anyone’s ability to pay back money, rather it tells more about *how valuable* a credit customer has been in the past.
I hate to admit that I have only a slightly better than mediocre credit rating because five years ago I paid off my 30 year mortgage in under seven years, and now no longer have that line of credit. In addition, I only have two credit cards, with small limits that I often bump up against, even though I usually pay my bill in full every month. The fact that I’ve had these cards for over 25 years works in my favor, but somehow not enough to give me an interest rate of under 20%. Hence, I rarely carry a balance.
Until credit ratings take into account an individual’s other assets, income, and employability, they’re pretty useless in determining who is truly credit worthy.
