620

clipped from www.tnr.com Soon forthcoming in the top-ranked Quarterly Journal of Economics is a very well- received paper by four economists with convincing evidence of what many believe was the primary cause of the subprime boom and bust: That securitization took away the incentive for lenders to properly vet borrowers. But there's some new evidence questioning the paper's findings. To understand the how and why, we have to get into the nitty-gritty of the empirics. If you plot FICO (i.e., credit) scores against the number of mortgages outstanding, you'll notice a peculiar pattern: In the 1990's, Fannie and Freddie released research showing that about 50% of defaults are associated with borrowers who have FICO scores below 620. That happens to be where the biggest jump in the graph above takes place, suggesting that the industry looks far more kindly on a borrower with a score of 621 than a borrower with a nearly identical score of 619.