According to Merriam-Webster’s Dictionary, “86” is a slang term that is used in the American popular culture as a transitive verb to mean throw out or get rid of, particularly in the food service industry as a term to describe an item no longer available on the menu, or to refuse service to a customer.
My use of the term “86” is more to see lenders refuse to run the Fair Isaac Corp.’s FICO credit score as the top item on the mortgage menu.
What do I mean by all of this? The FICO score remains the sole determination of whether or not a potential homeowner should even be considered for a loan in the first place. And if they do make it past the FICO front gate, the credit score determines how much the cost of lending will eventually be.
In today’s world, the credit score remains important, but having loans live and die by someone’s FICO is simply leaving money on the table and denying the American Dream to people who can afford a loan, despite what their credit score says.
Let me explain.
First, I’m not suggesting totally yanking FICO or Vantage Scores or anything like that. What I am recommending is the adoption of other models that would equally, oreven more effectively, determine who can repay a loan.
Second, opinion on the effectiveness of FICO varies. So if opinion on its effectiveness is so in question, why do we give it so much weight? It doesn’t make sense and we need something else, which I will get to later.
Kristin Messerli is the founder of Cultural Outreach Solutions, a multicultural consulting firm, assisting companies in the financial industry to better reach and serve emerging demographics.
Messerli made the argument on a HousingWire.com blog post that switching to FICO 9 would increase homeownership:
The Fair Isaac Corp. recently announced their newest version of the commonly used credit scoring model, FICO. The new version, dubbed FICO 9, is purportedly more accurate and beneficial for first-time homebuyers. Unfortunately, adoption of this scoring model is highly unlikely anytime soon.
FICO 9 addresses issues that are high on the list for Hispanics and millennials, who are expected to make the majority of new-home purchases over the next decade.
First, the new scoring model diminishes the effects of medical collection debts. As long as the debts are paid (whether or not they went to collections), they would have little influence on an individual’s credit score.
Millennials are likely to be most affected by this scoring adjustment. The majority of millennials prefer online banking and automated payments. Because medical bills do not arrive electronically, they frequently go unnoticed until they have already hurt their credit. FICO 9 does not penalize consumers when these previously unknown debts are paid.
While FICO indicates a slight increase in credit scores (a median increase of 25 points) for consumers with medical debts, the real impact of FICO 9 is its evaluation of borrowers with a limited credit history.
In the comments section it became clear that not everyone agrees with Messerli, thereby exemplifying my point that with opinions so mixed, what’s the sense in relying so heavily on the FICO in the first place?
Some love it. Nikato Muirhead commented, “All the lenders said my wife’s credit score was at 570 and would not approve her for a loan. I called Ditech and that had her at 619!! All her collections are medical, the clear implication of this is that Ditech appears to be using fico 9 — they just wont tell you. So happy. Approved for house now after months of searching. I can’t speak for other lenders, but Ditech seems to be on the cutting edge.”
Reader Dave Sullivan, however, questioned the very reason for the argument and then clearly challenged Messerli’s point in the first place.
“FICO 9 has made some improvements over FICO 8 that was a big improvement on the forbearer FICO 04. Fannie and Freddie require that every mortgage sold to them uses FICO 04,” he said, and then added in a follow-up comment, “Well done trying to get the word out that FICO 9 will not help anyone getting a mortgage any time soon… Thank you.”
So, if something, as Sullivan states, doesn’t help lending, it should be 86’d from the top of the menu. Or if Muirhead is correct, the common use of FICO only serves to confuse homeowners about the process. Also a reason to 86.
At this point, representatives from FICO are probably picking up the phone to chew me out. For those of you still following my argument to this point, thank you; here is my proposal for what should supersede FICO in the lending process.
In the crowdfunding space, where there are exciting innovations in real estate investments, the use of peer behavior and peer review play an ever-growing important role in lending.
At this point, we are in the third year of the JOBS Act, the legislation that opened up millions of dollars in capital access to emerging and small businesses both nationally and across the globe.
Analyst and research firm Massolution released a 2015 Crowdfunding Report on showcasing real estate as one of the dominating sectors to benefit from crowdfunding, driving $2.5 billion in capital this year alone.
Here are the top findings of the report that your audience might find interesting:
1. Real estate crowdfunding grew 156% in 2014, just breaking the $1 billion mark, with campaigns ranging in size from less than $100,000 to over $25 million.
2. In 2014, North America stood as the largest region by funding volume at 56% market share, compared with Europe at 42%.
3. This year, U.S. commercial and industrial property crowdfunding expects to see a 250% increase.
Take another look at that third point. A 250% increase. How is that possible? One way crowdfunding opens up its credit box in the commercial space is by peer review. They go on Yelp and other sites and see if people like the tenants in the commercial spaces, if people not only frequent the services, but look likely to return.
They also look at the peer behavior. Do other business pay the rent on time? If so, then all businesses in a property are likely to pay on time?
It should be no different in residential single-family homeownership.
In a neightborhood with few foreclosures, the potential homeowner is less likely to default. Take a look at their family’s loans. Are those performing? Or are they part of a family of deadbeats? What about their friends?
Lenders feel comfortable with the credit score, but it gives such a poor picture that it’s almost a tragedy.