At least that was what Fair Isaac pitched to lenders.
Thus spawned several years of streamlined loans – loans that were predicated solely on credit score. "Stated" loans allowed people with good credit scores to put down any income figure on a loan application and get approved. The sheer number of applications in an overheated market where an hour could mean a $50,000 difference in selling price necessitated glossing over details that were mandatory – or at least a consideration – in pre-FICO days. (I know you're thinking, what, there was a time when credit scores didn't exist? Credit scores weren't developed until the late 50s.)
According to an article in Time magazine,
A few years ago, Fair Isaac produced a chart predicting the odds that a borrower with a certain credit score would default on a mortgage. For example, it predicted that a loan to a borrower with a 680 score had a 1 in 144, or 0.7%, chance of becoming delinquent over the life of the loan; a person with a 700 FICO score would have a 1 in 288 chance, or just 0.3%.
Unfortunately, those predictions proved too optimistic. According to mortgage-data tracker First American Loan Performance, banks have already foreclosed on or are in the process of foreclosing on 1.5% of the mortgages originated in the last three months of 2007 to individuals with credit scores between 660 and 720. And those mortgages have been around for only a year. Over 30 years, the delinquency rate on those home loans is likely to be much higher.
The rise in defaults among "good credit" borrowers is beginning to force lenders to revert back to more traditional ways of predicting risk. Consumer advocates who have long opined that a three-digit credit score managed by for-profit entities is an inaccurate measure of creditworthiness should be pleased at this trend, which takes a number of variables (such as phone bill payment records) into account - especially helpful for those borrowers with thin or non-existent credit histories.
