Back between 2004 and 2008, the financial system’s desire to get anyone into a home was so great that even if you didn’t have a job or couldn’t afford a home, lenders would manipulate applications so that those below the poverty line were able to purchase $600,000 and higher McMansions.
Now in 2017 when once again many American are maxed out on their debt limits and consumer spending is falling off a cliff, the institution that determines and regulates credit scores (FICO) is turning back the clock and will soon be removing damaging credit events from indivuals credit reports so that it will be much easier for consumers to borrow more credit, and increase their ability to spend and keep the economic ponzi scheme going a little bit longer.
Back in August 2014, we reported that in what appeared a suspicious attempt to boost the pool of eligible, credit-worthy mortgage recipients, Fair Isaac, the company behind the crucial FICO score that determines every consumer’s credit rating, “will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.” In doing so, the company would “make it easier for tens of millions of Americans to get loans.” Stated simply, the definition of the all important FICO score, the most important number at the base of every mortgage application, was set for an “adjustment” which would push it higher for millions of Americans.
As the WSJ said at the time, the changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores. “It expands banks’ ability to make loans for people who might not have qualified and to offer a lower price [for others],” said Nessa Feddis, senior vice president of consumer protection and payments at the American Bankers Association, a trade group.” Perhaps the thinking went that if you a borrower has defaulted once, they had learned your lesson and will never do it again. Unfortunately, empirical studies have shown that that is not the case.
Now, nearly three years later, in the latest push to artificially boost FICO scores, the WSJ reports that “many tax liens and civil judgments soon will be removed from people’s credit reports, the latest in a series of moves to omit negative information from these financial scorecards. The development could help boost credit scores for millions of consumers, but could pose risks for lenders” as FICO scores remain the only widely accepted method of quantifying any individual American’s credit risk, and determine how much consumers can borrow for a new house or car as well as determine their credit-card spending limit – Zerohedge
Since the U.S. began to downsize industry and offshore most manufacturing jobs in the middle to late 1990’s, the primary core components that make up the nation’s GDP are consumer and government spending. And as such if these two data points decline even the smallest amount for any reason, they play a significant role in determining whether the U.S. economy achieves positive growth, or if it falls into a recession.
With price inflation beginning to ravage the average family’s bottom line after years of zero percent interest rates and a massive expansion to the monetary base, all signals are pointing towards the fact that the American consumer is pretty much tapped out, and there is little blood left that can be squeezed from those turnips. And just as the ratings agencies willingly signed off on a AAA rating to what anyone could see were absolutely junk securities during the end of the housing bubble, now the credit agencies are doing a similar thing for consumers in the desperate hope that they will borrow more money they can’t afford so that they will spend spend spend to keep the nation’s GDP number from falling into recession.
Kenneth Schortgen Jr is a writer for The Daily Economist, Secretsofthefed.com, Roguemoney.net, and Viral Liberty, and hosts the popular youtube podcast on Mondays, Wednesdays and Fridays. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.