Thursday, October 25, 2007

Sub-prime Intelligence

There are some things you just couldn’t make up if you tried.

Countrywide Financial
, Merril Lynch, CitiGroup, and a host of lesser lenders are going through death throes following the subprime meltdown. Never mind that the percentage of skanky loans is miniscule in the grand scheme of things. Once credibility, trust, and standards of judgment have been tainted, the whole lot is spoiled.

Granted, with thousands of loans scheduled to reset in coming months, forcing cash-strapped families to choose between groceries and making a mortgage payment, everyone is scrambling to devise alternative solutions.

You’d think we’d learned our lessons about taking short cuts, addressing causes instead of symptoms, etc. Apparently not.

“Individuals with adjustable mortgages whose payments have escalated beyond their means and whose credit scores are too low to refinance are now finding a creative way to keep from losing their homes to foreclosure. Commonly referred to as credit piggybacking, the method has been used since credit cards were created and has been in practice on a large scale for the past year.”

That’s the opening paragraph of a press release from publicists for TradeLine Solutions, which promises to improve individuals’ credit scores by 200-points within a month.

Short cut?
Smoke and mirrors?

TradeLine “maintains a portfolio of trade lines, or credit accounts that have perfect payment histories,” describes the release. “By adding the individual as an authorized user to one of the good-standing credit accounts, that individual’s credit score automatically increases by several points.”

Wow. Next thing you know, they'll be turning lead into gold.

The publicity piece rationalizes the practice as being equivalent to a parent adding a child as a user to one of their accounts. What TradeLines does is multiply the effect over several credit accounts for one individual. The resulting effect builds up “credit worthiness,” raising a FICO score from, say, 500 to 700. This then enables a formerly-shaky client to qualify for better loan terms, like a lower interest rate, thus theoretically staving-off foreclosure.

TradeLines boasts the practice is “perfectly legal and can make a difference in a person getting a loan at a dramatically lower rate.”

This does in 30-days what generally requires a year to accomplish. That’s because the only real remedy for repairing a bruised credit history is the passage of time…time in which subsequent payments are made without a miss.
That's the kind of thing you just can't fake.

The press release goes on, blah-blah-blah, yadda-yadda-yadda, insisting the whole scheme is perfectly legal.
It’s also stunningly stupid.

Credit Piggybacking is the equivalent of telling a cancer patient (I am a survivor) that if they switch X-rays with a person who is cancer-free, they qualify for life insurance. The reality is the cancer is still killing the patient, and as such, they’re still a lousy risk for life insurance.

By allowing a person with flawed pay history to sign-on to an established account that shows no payment flaws does not remove the fact they’ve been poor credit risks in the past. It is basically lying to the lender considering the creditworthiness of the applicant.

This is unconscionable.
It may be legal, but it’s morally reprehensible.
Guess some people just don’t get it.

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