A rising tide lifts all boats right? Well it also means credit scores get lifted alongside the economy. Goldman Sachs thinks this is a problem. The bank is arguing that credit scores have been artificially inflated by FICO, a dangerous development that could have implications for all sorts of lending. Goldman thinks that current FICO scores are not an accurate reflection of consumers’ ability to pay in an economic downturn, meaning there is much more credit risk sloshing around in the economy than is currently priced into the market.
FINSUM: The big risk here is really at the lower end of the lending spectrum. There are 15 million less consumers with scores of 660 or below than there were before the last Crisis. Therefore, the risk of borrowers in that area is probably being underappreciated.