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S. subprime mortgaging industry - issued and bought a significant number of non-conventional subprime securities in the run-up to the US subprime crises. When I was a state regulatory agency at the outset, I worked with peers across the nation to curb lenders and cut or remove the amount of these credits on rapacious and untenable conditions.
Since my peers and I were targeting the most serious excess in the mortgages industry, such as the abandonment of down payment and the acceptability of lower creditworthiness, we were almost constantly criticized for blocking lending to more prospective home-owners and their fulfilment of the American dream.
Fannie and Freddie were admitted to the conservatories, partly due to the GSEs' faulty lending book. So while the downturn hit Americans across the socio-economic spectrum, those who had been given debt due to lower levels of leverage were more likely to miss their mortgages or defaults.
Over the years since the financial turmoil, we have seen real efforts to repair at least some of the associated losses and restore the resilience of the markets. Unfortunately, today we are again seeing a demand for lower levels of leverage - this one in the shape of an alternate Fannie and Freddie score that does not satisfy the FICO score, the minimal score required by the present one.
Simple, lower defaults produce fewer predictable values, which means a higher risk for the creditor. In the case of Fannie and Freddie, this creditor is finally the tax payer. Again, advocates of a change in subscription standard are doing so in the name of improved lending accessibility. However, it does not seem that the VantageScore option suggested (owned by the three loan agencies Equityfax, Experian and TransUnion) would actually do so.
As VantageScore alleges it can attract tens of thousands of additional borrowers, a recent review of its estimate showed that even if this requirement was correct, it would lead to a small proportion of these estimations resulting in real mortgages being closed. VantageScore uses exactly the same source of information as the FICO score and only creates extra score when FICO's minimal FICO score requirement for the length and denomination of the loan repayment histories no longer applies.
Demands also exist to allow lenders to select between a FICO score or a Vantage score - but authorising more than one rating score system will necessarily result in disputes between or among them. Prior to the sub-prime financing crises, the sale of sub-prime assets depended on their capacity to obtain AAA rating status.
Financial inducements to attract and retain sellers gradually but unstoppably have, over the years, led all credit ratings to lower their ratings. Much the same would happened if lenders were able to use the score of their choice. However, if a debtor is admitted to a mortgages that he cannot eventually pay back, the impact on the general economy is serious and devastating for the family and especially for local people.
What the subprime lending boom has shown us is that a mortgaging operation that lends toorrowers without taking their repayment capacity into account is not a preference for the lender, the residential property markets or the taxpayer. Do I mean that the transition to an alternate system of creditworthiness will unilaterally trigger the next global recession?
However, the approval of otherwise non-eligible candidates leads us to move these candidates and the markets again towards an unavoidable settlement. We do not intend this to prevent us from taking new and inventive approaches to strengthening our rating and financial reporting system. Instead of lowering the standard of current methodologies for score management, there are promising examples of new, strictly enforced alternatives to the use of external rating agencies.
It has the realistic capacity to get Americans out of the shadow of loan uncertainty and act as a link to more sophisticated lending choices such as mortgage lending.