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This series of blogs is derived from my discussions on the LinkedIn Quant Finance: What is the best approach to handling CMBS &/or RMBS Credit Risk analysis? discussion forum. Russel explained that “projected defaults” are foreclosures + delinquents, and all his observed FICO scores were above 670.

 I saw FICO scores between 520 and 820, and almost always once a loan became delinquent it would foreclose.

The main reason I did not consider delinquencies was because I had to be sure it did foreclose and the loan age when it foreclosed, and this data was not available for delinquents.

This agrees with your conclusion about delinquencies but our subsequent handling of the data is different.

Your last comment sums it the best, the underwriting standards varied and deteriorated so much that FICO scores were no longer reliable measures of foreclosures. (eg 820 in sub-prime??)

Another possible scenario is that underwritten FICO scores are based on ‘good’ financial standing in a ‘good’ economic environment. But once a person experiences financial stress, FICO scores are lagged indicators with a range of or even an indeterminate set of lag times. Then given the financial stress all individuals irrespective of their original FICO scores, respond similarly to this financial stress.

That is under financial stress the underlying statistical behavior of the financially stressed population is different from the underlying statistical behavior of the population in good financial standing.

So FICO score may actually be good predictors of success, but poor predictors of failure. This is similar to company profitability versus Altman’s Z-scores. This first predicts success, the second failure.

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

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