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Why Giving “Credit Invisibles” a Mortgage Is a Disastrous Idea

by Richard A Reagan

You know you are back in an economic bubble when the mortgage finance industry wants to enable financially inexperienced consumers to obtain mortgages worth tens or hundreds of thousands of dollars, with little down payment and just about zero credit history. Such is the backdrop for the new push to serve so-called “credit invisibles” with “alternative” credit scores.

The argument is that there are plenty of credit-worthy borrowers who do not have enough of a traditional credit history to create a FICO score. The thinking is that an adequate picture of their financial capability can be pieced together by considering their payments for rent, credit cards, auto and student loans, and utility and cell phone bills.

However, contemplate how easy it is to build up a credit history, and what the absence of one represents. A would-be borrower can deposit $300 into an account for a secured credit card, be issued a card, and start using it regularly and responsibly. After six months, that person can have enough of a track record to create a credit score.

But because the mortgage industry is so desperate to maintain volume, and so many Americans are tapped out financially, some lenders feel compelled to crawl down the credit spectrum again.

Additionally, we have now seen the return of low down payment mortgages.

What industry rent-seekers are losing sight of is that there is much more to maintaining a home and staying current on a mortgage than just barely being able to afford the monthly note. There is a whole culture of properly preparing oneself for credit and responsibly handling it. And the odds are high that if a financial noob does not have enough money for a proper down payment, he or she will have a “credit event” when the old furnace in the basement needs to be replaced.

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