Are Americans' credit scores falling -- pushing more home mortgage applicants into so-called "subprime" loans? Could Americans' propensity for carrying increasingly heavy debt loads while spending more on consumer goods be depressing their credit ratings?

Officially, the company that developed the predominant "FICO" credit score -- Fair, Isaac and Co. -- says it has no hard evidence of any wholesale decline in scores. But a new, statistically-significant sampling of FICO scores generated by a large independent credit reporting agency suggests that home mortgage applicants' scores are indeed slipping.

The detailed scoring data, provided exclusively to Realty Times, examines all the FICO scores pulled by the credit agency during May, 1998 and during May, 2001. The company provided the data on the condition that it not be identified.

Executives at the agency said the month-to-month comparison of all credit scores generated during comparable 31-day periods three years apart is methodologically sound.

"There is no question that we're seeing a decrease in scores" by typical applicants, said one executive. "There is no other explanation for the data."

In May, 1998, 50.78 percent of FICO credit scores pulled by the agency were 700 or above. (FICO scores range from the low 400s to about 850, with low scores indicating greater credit risk.) In May of this year, by contrast, 37.92 percent of applicants had scores above 700.

Even more dramatic are the changes at the lower-quality end of the FICO spectrum. In 1998, just 6.34 percent of loan applicants' FICOs were between 550 and 599. This year the proportion had more than doubled to 12.8 percent. Scores at these levels are deep into subprime territory, and borrowers are typically hit with extra-high interest rates and fees, or denied the loan outright.

Once the low-FICO loans are closed by a mortgage company, borrowers with FICOs in the 550-599 range also tend to get stricter "servicing." At the first hint of a late payment, the servicer contacts the borrower with an immediate warning. Borrowers with higher FICOs, by contrast, are allowed considerably more leeway -- and sometimes aren't contacted by the servicer for weeks after a missed payment deadline.

Home buyers with even more heavily damaged credit profiles -- FICOs below 550 -- represented just 3.93 percent of applicants in May, 1998. This year they accounted for 8.61 percent. Overall, subprime borrowers with scores under 600 jumped from 10.27 percent in 1998 to 21.41 percent this year -- more than a 100 percent increase.

What's going on here? Federal financial regulators say consumer debt may be a key: Debt service payments now represent 14.3 percent of consumer disposable income, the highest it's been in 15 years. That alone could account for the drop in scores and points to a sobering financial fact for potential home buyers and refinancers: If you're carrying high debt loads, you're more vulnerable in any economic downturn. And with depressed FICO scores reflecting your debt load, you're likely to pay more for your next mortgage now -- recession or no recession.

For more articles by Ken Harney, please press here.

Published: July 16, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.