FICO: Don't blame us for mortgage mess

Dr. Mark Greene, the CEO of Fair Isaac, said that his company's FICO credit scores are not to blame for the mortgage meltdown.

The mortgage meltdown is hurting credit score provider Fair Isaac. The company warned in January that 2008 profits would miss forecasts and the stock has taken a huge hit.

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NEW YORK (CNNMoney.com) -- If you've applied for a mortgage, auto loan or credit card recently, then you're probably intimately aware of what your FICO score is.

Banks rely heavily on these credit scores to determine whether or not to give consumers a loan. And as Wall Street and Main Street sort through the mortgage mess, people are looking for scapegoats.

Some have argued that the company behind the FICO score, Fair Isaac (FIC), as well as other companies that provide credit scores, such as Equifax (EFX), Experian and TransUnion, are partly to blame since their credit scores could not accurately predict subprime default risk.

I talked to Dr. Mark Greene, the chief executive officer of Fair Isaac to get his thoughts about this criticism as well as his perspective on the mortgage market and economy at large.

Greene told me it's not, uh, fair to blame Fair Isaac for the credit crunch.

"People are looking for fingers to point and the FICO score comes in for critique," he said. "But we are quite confident that it has performed as well and is not an appropriate source of blame."

That said, Greene does think there is room for improvement. Fair Isaac is in the process of rolling out a new credit score product, FICO 08, in May. Greene said the new scores will focus on strengthening the predictive accuracy of credit risk of subprime borrowers as well as so-called "thin file" borrowers - people with little credit history.

Still, Greene maintains that credit scores are only one way to judge a borrower's creditworthiness.

He said the banks with the most problems with mortgages are those who relied solely on credit scores and failed to look at the other two of what he dubbed the "three Cs": collateral and capacity to repay.

Along those lines, Fair Isaac is also rolling out in May something that it calls a Credit Capacity Index. That will help banks determine how much additional debt a prospective borrower can handle.

These products may help lenders do a better job of gauging the creditworthiness of prospective borrowers. But unfortunately for Fair Isaac shareholders, it's unlikely to lead to a turnaround in the company's fortunes anytime soon. The mortgage crisis is taking its toll on Fair Isaac's sales and profits.

Before the company reported its fiscal first-quarter results last month, Fair Isaac lowered its sales and profit targets. The company also warned that results for the second quarter and the full fiscal year, which ends in September, would not meet analysts' forecasts.

Analysts now expect sales to increase just 1% this year and that profits will only be up 4%. The stock has plunged 23% this year.

Greene wouldn't address his company's outlook specifically, but he did have some not so encouraging things to say about the economy at large.

Greene, who joined Fair Isaac last year following 12 years on the financial services team at IBM (IBM, Fortune 500), also has worked for Citicorp (now Citigroup (C, Fortune 500)) and started his career in 1982 as an economist for the Federal Reserve.

"This slowdown is the first in 30 to 35 years that is clearly consumer-led," Greene said. He added that we "probably are entering a recession now."

Greene said it's usually easier to predict when a corporate-led recession will end. The big problem with the current downturn is that it's more about confidence - how consumers feel about job security and their household income.

If consumers are able to borrow more to buy homes, cars or other big-ticket items that could help get the economy back on track. But with lenders so concerned about risk, credit standards have tightened. And until they loosen, it's hard to forecast when this economic pain will be over.

"How quickly the ability for consumers to get credit is an important element in how quickly we recover," he said.

Another problem, Greene said, is that he's hearing from his customers that more and more consumers are reversing their typical payment habits and leaving their home payments for last, confirming a trend we reported about earlier this week.

Before the housing downturn, people tended to pay off their mortgage first, followed by their car loans and finally, their credit cards. But with Americans now facing a cash crunch and a precipitous drop in housing prices, some have decided the mortgage is no longer their top priority.

"People are paying their credit cards first. They don't feel the same incentive to pay off their home because of negative equity," he said.

That's obviously not a good sign for lenders that are already wary of extending more credit, which could mean that this downturn could lag on for a bit.

I tried to get Greene to predict how much worse the economy can get and when things might turn around. But his training at the central bank has apparently served him well.

"I learned a trick while at the Fed. Never give a date or a number," he said.

What do you think? Do borrowers deserve the most blame for the credit crunch? Banks? Wall Street?