Sunday, June 10, 2007

Paper Magic

It came as no surprise Friday when Fair Isaac Corp., the company responsible for determining how much "wealth" modern Americans possess in the form of their credit ratings, announced that starting in September its method of computing credit scores will include measures to neutralize the borrowers' practice called "piggybacking," according to a story by Brigitte Yuille at the website

Piggybacking is done by would-be borrowers with low credit scores, who "rent" space as authorized users on credit cards owned by people with excellent credit histories.

"Fair Isaac uses 22 pieces of data collected from the three major credit bureaus (Equifax [EFX], Experian [GUS], and TransUnion) to calculate a credit score -- 300 is the lowest, 850 the highest," is the succinct explanation of how the company does its crucial work in a November 28 Business Week magazine article. In recent years, shaky borrowers have been gaming the system in increasing numbers by piggybacking their names onto other people's credit cards, thus scamming the three major bureaus' data-collection systems by combining other people's payback histories with their own.

For example, when Alipio Estruch wanted to take on a $449,000 mortgage to buy a house near Fort Lauderdale earlier this year, he found his credit rating of 550 left disqualified him as a borrower. But after paying $1,800 cash to an internet-based company, (ICB), Estruch's name was added as an authorized borrower to the cards of several people with excellent credit histories. They were paid for the space on their cards, and for the $1,800 fee, Estruch boosted his credit rating to 715 overnight, qualifying him for the loan he wanted.

Piggybacking is a great deal for the cardholder renting the space as well. Some are making over $2,000 a month, getting paid between $100 and $150 a pop for each space they rent, usually on seldom-used cards. The rest of the (typical) $900 fee goes to the agency such as ICB who serves as the go-between for the would-be borrower and the reputable cardholder. Those borrowing on someone else's good credit history don't get any personal information, the full credit card numbers they're being added to, or the card expiration dates. Any sensitive information is protected by the agency, and the renters add the users' names themselves, with a phone call to credit card company.

It wasn't very long ago that people with borderline credit histories didn't have all that much trouble securing big real estate loans due to the expansion of the so-called "subprime" lending market. But now that production homebuilders are sitting on growing stocks of unsold houses, and the default rate among sub-prime borrowers whose homes are falling in value continues to rise, lenders have suddenly discovered that their "industry," as James Kunstler puts it, is "rife with irregularities in lending standards!" So the bogus lending practices of the recent past, such as the infamous "interest-only" loans for example, have now been replaced by bogus borrowing practices, such as piggybacking.

All this paper magic and manipulation of numbers only serves to underscore what a scam and a series of self-serving illusions the late capitalist American economy has become. The problem is that if the survival of even a remnant of the housing bubble, the one economic factor that has held up the economy for the last ten years, depends on the continued practices of paper magic of one sort or another.

Kunstler also points out that the housing bubble is collapsing at the same moment as the oil crisis of rising prices is setting in permanently. "These events will be happening simultaneously," he writes. "The housing industry, so-called, will never recover because the oil crisis spells the end of the suburban build out. The cycle is over. The big production homebuilders will go down and never come back."

This is why the end of "piggybacking," combined with the collapse of the "sub-prime" loan market and the rising price of oil, spells big trouble ahead for the U.S., at home as well as abroad.

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