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Your FICO Score on Steroids

Written By Brian Hicks

Posted June 7, 2007

As Barry Bonds continues to assault the home run mark established by Hank Aaron in 1976, I’m reminded of the last great home run record to fall. That was in 1998 as Mark McGwire and Sammy Sosa dueled it out over the course of a long hot summer to see who could top Roger Maris’s magical record of 60 home runs in a season.

McGwire, of course, took the crown as he belted 70 home runs that year, beating Sammy and obliterating Maris’s long-standing record. The monumental battle captured the attention of the nation, drawing in fans and non-fans alike.

Some even say that the race saved the game. Heady stuff, back then.

It wasn’t until much later, of course, that the truth about the contest finally emerged. The race that year was an illusion. McGwire and Sosa weren’t using juiced balls but apparently the juice itself–steroids. In short, they cheated.

I bring it up because I know the draw of big money can be so powerful that it can often divert people from the path and deep into a world of fraud and lies. Big leaguers simply get on "the cycle," while some "ordinary" folks bring home the big bucks by lying and cheating their way to it. There’s really not that much difference.

But what all of this fraud creates is world where nothing is quite as it seems. Fraud, after all, can wildly skew the numbers. Just ask Barry Bonds.

Nowhere has this been more apparent than in the housing industry, where a wild mix of flippers, scammers and con artists have built entire businesses around burying the truth.

One of them came across my desk earlier this week, and when it did it floored me.

It was in an Associated Press story, and it dealt with the practice of "piggybacking."

It floored me because it really was in so many ways the final straw in mortgage fraud. That’s because it completely tarnished the integrity of the only thing left standing in the business–your credit score.

As if it weren’t bad enough that appraisers routinely offered inflated property values and that "liar’s loans" had disconnected loan amounts from real income, now the credit score had become "creative" too. Good luck finding the truth in that mess.

The way it works is simple, and the guy who thought it all up probably now has more money than he ever dreamed of. But that doesn’t make it any easier to swallow, because it makes a total sham of one the most important underlying factors in any loan decision.

What it does is allow people with bad credit (scores below 600) to ride along or "piggyback" on the credit histories of people with great credit (above 720). So, in essence, a high-risk borrower can dramatically improve his score by "borrowing" the impeccable credit history of low-risk borrower.

The effects can be dramatic. Users of the service have seen their scores skyrocket as much as 205 in a couple of months. That’s often the difference between a loan approved and a loan denied.

These inflated scores also mean much smaller monthly payments. An applicant with a real score between 500 and 579 would only qualify for an interest rate as high as 9%, while that same borrower, using piggybacking, would be offered the market rate, which is closer to 6%. For a loan of $300,000, that would make for a difference in payment between the two notes of $789.00.

Surprisingly, though, it’s all technically legal even though it completely undermines what’s left of the integrity of the underwriting process. After all, ninety percent of the largest U.S. banks base their loan decisions partly on Fair Isaac Corporation (FICO) scores.

Legal or not, though, the practice is absolutely insane. Sadly, mixed in with the rest of the mortgage morass it hardly causes a ripple.

While various government agencies promise to look further into the matter, the game goes on just like in baseball, even though everybody knows it’s wrong.

Of course, as in baseball, they could always mark the record appreciation in home prices that all of this fraud caused with an asterisk. It only seems fitting.

By the Way: The National Association of Realtors (NAR) said yesterday that declines in U.S. home sales and prices in 2007 are going to be steeper than earlier forecast, contributing to slower economic growth.

According to the NAR, sales of previously owned homes will probably tumble 4.6 percent to 6.18 million units, and the U.S. median home price will likely fall 1.3 percent to $219,100.

Only a month ago, the association said it expected 2007 home sales to decline 2.9 percent and home prices to slide 1 percent in the first price drop since they began keeping records in 1968.

Wishing you happiness, health, and wealth,


Steve Christ, Editor