Slashed FICO score will not discourage strategic default
In a blog Thursday, FICO detailed the results of a survey on the likelihood of increased strategic defaults. The answer overwhelmingly pointed to the notion that people will continue to walk away from their underwater homes, something FICO will probably nail their credit score about 150 points for.
But my question is this: How many of the people strategically defaulting will actually care about the 150-point hit? Probably not many.
People with high credit scores and big mortgages are actually the most likely to strategically default. These people are educated in finance and understand the consequences of walking away from their home, and choose to do it anyway.
Several of the indicators predicting strategic default are things you would expect from the best borrowers: High credit ratings, always paying on time and in full, up to date payments on things like credit cards and car loans. They've also probably only been in their homes for a short period of time.
While, to the outside viewer, those traits might seem desirable, they are actually the opposite. They indicate the homeowner is intelligent, money conscious and doesn’t have a huge emotional attachment to their home outweighing the investment perspective. Can you hear the bomb ticking?
The thinking is as follows:
“Yes, I’ll take a hit to my credit, but I owe $300,000 more than my home is worth, so this is just good business.”
And, to this high-end defaulter, chances of not having wonderful credit isn’t that much of an inconvenience in the first place. What does a multimillionaire care if he can’t get a car loan? He can buy one with cash. How about a huge home repair that would require tapping a couple of credit cards? Cash. A new condo to live in instead of that house you defaulted on? Cash…or at least a massive down payment.
And, there are plenty of obstensibly reputable people all over the interwebs explaining how to walk away from your home “and live scott-free for years” and even going so far as to advocate the practice.
So, what’s the mortgage provider supposed to do? In its blog, FICO recommends lenders “account for the risk” when lending in declining markets. Meaning, people who otherwise would have had a fabulous chance of getting a low interest rate loan (good credit, high incomes, etc.) are now…what? Less likely to get a loan?
FICO presents many interesting points. However, lenders can't be blamed for lending to people who prove they can afford to repay the mortgage in the first place. So it's likely that, for all of FICO's good intentions, strategic default risk is one that will be around for a long time.