Credit rating agencies compile consumer information that they receive from lenders and other related companies and assign borrowers a score based on their short and long term uses of credit. They exact methods used to assign one score or another are not nearly as important, though, as how much weight lenders place on credit reports when determining whether someone deserves a home or not.

During the housing boom, virtually the entire loan application process depended on the borrowers' credit scores. If a home buyer had displayed responsible use of credit, a prime loan was almost guaranteed, while debtors with lower credit scores were often given subprime mortgages to purchase or refinance a house. In any event, other qualifications like down payment and stable income history became far less important than having a high credit score.

One of the maxims of stock market investing has always been that "past performance is no indication of future results." However, this is exactly what mortgage lenders were counting on by giving huge sums of money to people who had good credit histories but little money or other resources to meet a financial hardship. Wall Street was willing to give mortgages to people and then hoped that they would pay reasonably on time, since they may have done so somewhat consistently in the past.

With the right subprime lender, even previous foreclosure victims and those who had filed bankruptcy numerous times in the past could obtain a loan to purchase a new house. Some banks specialized in such difficult to place mortgages, knowing it would be easy to increase fees and the interest rate of the loan because of the poor credit history. This meant more income for banks, investment firms, and investors, until the homeowners inevitable defaulted on their mortgage again.

The ratings agencies did not substantially alter their methods of scoring loan applicants or borrowers in general during the run-up in housing prices from the late 1990s to the middle of this decade. It was mortgage lenders that ignored other previously important loan qualification criteria and placed too much faith in simply having a good credit score. And having a somewhat poor credit history just meant more fee and interest income for the banks, so even that was no barrier against obtaining a mortgage.

While home prices were rising every year, this strategy made some sense for the banks, who could just loan money to everyone, collect the payments, and then foreclose on the house later on if necessary, selling it for a profit on the open market. But when home values began falling, investors realized they had been stuck with toxic loans going delinquent by the hour, and no one was buying the foreclosed properties at all anymore, let alone at a profit. Many lenders went out of business, while others began to tighten up lending guidelines.

It was at this point that the credit rating agencies began to take a more traditional role in the lending process. A good credit score more important than having any credit score at all, and mortgage companies began to focus on other factors like down payments and having a job that produced enough income to pay the mortgage. This is a more reasonable role for credit agencies, as a guide to assist mortgage companies in viewing a complete picture of a borrower's ability to pay a loan, instead of as the sole determinant of fee and interest income for every loan applicant.