Walking away from an underwater home will knock about 140 points off a person’s credit score. And, it will take seven years to rebuild that bullet-proof FICO. None of that is news, but Amy Hoak’s Home Economics column on MarketWatch gives FICO’s Joanna Gaskin the soapbox to scold those thinking about taking a walk.
The director of mortgage markets says,
Credit remains very tight across the board, so lenders, landlords are looking for pretty pristine credit. There’s leeway somewhere if someone had an explainable life event, a one-time blemish on their record that is pretty explainable.
Within the mortgage business, no one is thinking that strategic default is explainable.
A strategic default may not be explainable now, but how about in a few years. If enough people walk away and mortgage lenders start lending again, a strategic default may not be looked at in the same light it is today. The key point Ms. Gaskin makes is that “credit remains tight across the board.” That means lenders are looking for reasons to turn down borrowers. When that wind changes, so will the view of a strategic default on a person’s credit report.
Hoak then throws out the canard that landlords won’t want to rent to someone who has strategically defaulted, with Gaskin saying this, “Landlords that make inquiry into credit history may be disinclined to rent to a strategic defaulter or may offer less favorable terms than to a consumer with a strong credit history.”
So we’re supposed to believe that a landlord would turn down a renter because the landlord notices that previously the potential renter made the savvy financial decision to walk away from an underwater mortgage?
Gaskin goes on and on. Your insurance rates will go up and you’ll even have to pay more for your cell phone if you walk away. People don’t walk away unless the numbers are very compelling. So, even if you had to pay another $10 a month for phone and a little more for insurance the thousands saved each month not feeding an underwater mortgage is still worth it.
“A foreclosure walk away is not good for anyone — the neighborhood, the consumer, the investor. The more that we see this activity, the more we will see a downward cycle in the housing market,” Gaskin said, implying that the entire housing market and neighborhood values depend on what an individual decides with his or her finances.
“There are some tell-tale signs of strategic defaulters: They typically have higher credit scores before defaulting, and have less utilization of their credit lines, according to FICO,” Hoak writes. “They also often have lived in the home for a shorter amount of time, so they have less attachment to it.”
So strategic defaulters are financially savvy, use credit properly, and recognize a house for what it is.
Strategic defaults peaked in September of last year, writes Hoak. But as Laurie Goodman points out, 11.5 million borrowers–one in five nationally–are underwater.
Maybe we should say, “peaked for now.”
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And don’t forget that if you file Chapter 7 bankruptcy, your FICO will return to stellar a lot quicker. I’ve seen credit worthiness re-established in as little as a year. In my market, renting to “walkers” on favorable terms is par for the course. No one asks questions.
Walk, nay, boogie away, today!
It is ironic that many of the Ninja loans – no income, no job, no assets were approved on the basis of a FICO score greater than 650.
“Peaked for now” says it all! The Depression is not close to ending. It will continue indefinitely. The country has accumulated unprecedented debt that cannot be repaid, a huge penalty that will burden you and other income earners for at least the next 40 years. According to the Wall Street Journal, the head of the Organization for Economic Cooperation and Development said that most risks to the global economy are now on the downside. “The outlook is surrounded by risks,” Angel Gurria said at the Brussels Economic Forum. “Unfortunately at this stage, most risks are on the downside,” he said, noting further increases in commodities could feed into core inflation. Mr. Gurria also noted the effects of Japan’s tsunami on the world economy, the risk of a deeper slowdown, an “unsettled” fiscal situation in the United States, risks in some housing markets and possible “pending surprises” from financial institutions, particularly in Europe.Imagine living with a responsible government like Hong Kong, in a Mediterranean climate like California. Unfortunately, no such Utopia exists; but Chile offers a combination of pleasant climate and fewer government burdens than many others. If you’re ready to shed the debt your government has imposed upon you, it is a good destination to consider:
http://brophyworld.com/move-to-santiago-chile/
The ‘credit score’ stuff is a scam.
Many people look at high credit scores with pride, but in reality it’s just a reflection on how much money you bleed out to your banks. The tag does not indicate how trust worthy you are or your ability to pay back loans… instead it is designed to indicate how profitable you are.
Many people are confused on how credit score works or how it’s calculated… but it’s pretty easy to guess accurately once you realize the implications of this.
The secret to getting a high credit score is:
Take on as much debt as you can and then maintain it for as long as you can. Make only the minimal payments. Do all that and spend ungodly amounts of money on banks, make every purchase you do inflate in cost by 200-300% for all the interest and other payments you make on your loans…. and you’ll have a fantastic credit score.
Of course it’s completely insane to spend 30-60% of your income to maintain your debt and get a good credit score to save 10-20% on loans… but that’s what many people pride themselves on.
I listen occasionally to the radio here so-called financial advice shows. Call after call seems to be people worried about their credit score. Stuff like they just defaulted on a couple loans and now they want to find out how to build up their credit score…. Then the radio host will give some insane advice like get a couple of those pre-paid credit cards that are a utter rip off.
Why the hell is it good advice that once you just wormed yourself away from old debt that your worried about your credit score… that you should all of a sudden work your ass off and spend hundreds of dollars to get into more debt?
It’s just insane! Run away from the banks screaming would be my advice! Get away as fast as you can and never look back and keep your money, save your money, and learn to live with less so you can live with more! God damn the credit score and full speed ahead!
I admit I fell for their bullshit lies about credit score. I lived most my life without ever taking out a loan. Just paid for everything with check and cash. Zero credit score. Then I got a house loan through the government. Fortunately I did my own math on how much it would cost and got a very modest house I could easily afford… even though I had people telling me that I was stupid since I was approved for a much higher amount. But I was still stupid since I became a bit obsessed with my credit score. Got a couple of credit cards, took out a unsecured personal loan to pay for transportation….. started looking into getting a 4 year degree and student loans.
Thank God I woke up to their bullshit!
I went from being carefree about money and having plenty to spend on whatever small things I wanted and waiting months to getting big purchases…. to a guy that was strung out with no money and every month was a continous struggle to keep my finances straight and trying to calculate out how much I could have out of each pay check and so on and so forth. Life became unpleasant. I went from being a guy that was not afraid to stand up for myself at work to some impervious neurotic that was scared to ‘rock the boat’, etc etc etc.
Now I understand the term ‘Wage Slave’. It’s not just about being a hourly employee and living pay check to pay check…. it’s mortgaging your future to pay for your past and using all your income to make other people richer. Paying 700-1200 dollars to the bank for a 500 dollar washing machine. Buying consumer goods on debt only to have them break and rot away before you finish paying them off.
Screw that!
Now my goal is to get back to having a Zero credit score. I’ve gotten rid of my credit cards (OH no getting rid of your cards can hit your credit score!) and other debt… now all I need to do is finish paying off the mortgage (Oh no, but the interest rate you pay on your mortgage is less then what you could be making if you invested your money in the stock market!) and then I will be set for life.
No debt, no financial obligations will afford me the freedom to seek out new opportunities, change careers, move about the country or maybe the world without worry…. I will become a free man once again.
Oh, but wait. If I get freedom then my phone bills may be slightly more expensive. Never mind. I guess I am wrong about the credit score being a scam. I guess I will go back to being a debt slave and making bankers rich for doing nothing but enabling me to buy future garage sale fodder at inflated prices.
Dave “Debt Is Dumb” Ramsey brags that his FICO score is zero.
Ramsey rocks!
Why does credit score gets lower when you go away? Isn’t it the case that most people who do it end up in a significantly better financial?
Because you defaulted; regardless of whether what nate said is true, your credit score is a summation of your credit history.
Yes they are: they’ve just shed a ton of expenses and removed a huge liability from their balance sheet (assuming the loan is non-recourse or they went into bankruptcy). Granted, creditors will consider you a poor statistical risk for repayment on a loan but that’s not the lesson you should take from this. People should arrange their affairs so they rarely, if ever, need a loan.
I think the best strategy is to have enough liquid funds to make a large purchase with cash – but to use other people’s money to finance it. For instance in our family we put everything on the credit card but have never carried a balance. Thus racking up cash back, fraud protection, and convenience that credit cards provide.
Not only that, but with an automobile purchase we were able to get 2% APR and could invest the rest at a higher return rate. Credit is fabulous if used correctly.
Yup, we do this too. We seldom pay cash for anything, yet we have basically $0 credit card debt and a very small mortgage.
Someone (who ?) once said that the government only reflects the mentality of the people who elect it. It is hardly surprising that the financial strategy of the government and the majority of its citizens are so well aligned.
-Borrow money for consumption rather than for investment.
-Live beyond your means.
-Borrow more money to pay the interest on outstanding debt.
Borrowing money for a government only makes sense if the marginal productivity of debt is greater than 1. Today, this is not the case.
For a consumer, borrowing money now to pay for consumption only makes sense if you see your earnings rising in the future – live now, pay later.
Borrowing money to buy a house made sense when house prices had a pattern of increasing 5% a year – an easy way to make a leveraged bet and live for free, and buy consumer goods with built up equity for free.
Unfortunately (or fortunately), while this strategy may have worked in the past, it does not work today. It may work again in the future, but it will be the result of inflation rather than the result of economic growth.
People graduating from college used to be able to look forward to a good stable job with annual income projected to increase for the following 15 years. Now, the only jobs that offer this are government jobs- this is true for both the government and consumers.
The credit card and college loan industries are a racket. Banks are borrowing money from the Fed at 0% and lending it out to college students who can not afford it. This has to be bubble generating – where is the real wealth going to come from to pay back this debt. This is even more the case since many students graduating can not find good paying jobs.
Landlords don’t have the luxury of looking at credit scores when renting. There’s a glut of empty rental properties, too. Even if they do, the worst they’ll do (like back when I had no credit history) is ask for a first and last month deposit.
I hate debt and I never want to be in debt my entire life. I have never owed anybody money and I will never put myself in a debt situation.
People who want to have a good credit score are people who need to borrow money. I don’t care about my credit score because I never needed, I don’t need and I will never need to borrow money.
If I want something, I first save the money and when I have enough money I buy what I want. If I never have enough money for what I want then I don’t buy it. It’s a simple as that.
it’s good to have a job, isn’t it?
(or another relatively secure source of income)
I don’t give a darn about a potential tenant’s FICO score. I am interested in hearing from former landlords, court/criminal records, and google searches–not whether you made wise business decision and walked from a bank who failed to do this kind of due diligence.My own interests are served, if I can purchase your foreclosed property for less than 50 cents on the dollar. Then I can more easily adjust my rents downward to reflect ground reality, not my wishful thinking in recouping my borrowing costs.
I think this is actually what landlords do. They are interested in whether you paid your rent/utilities and whether you have a criminal history, not your credit risk, because they can always charge you a deposit that covers the costs to kick you out. They use the ratings agencies but use a different “score.” This is just my impression; somebody may know different.
Family member marries guy with gorgeous house. She tries to sell her house. Appraised at $169,000. Bank turns down $125,000. She opts for short sale. Inspector shows mold. Correctable with one bottle of Clorox Cleanup. Deal falls through. She opts for deed in lieu, sells almost new appliances, gets bonus from gov for avoiding foreclosure, doesn’t care about credit rating, makes good money as does spouse. So many people are doing this the FICO system is rapidly becoming an amazing fortress built on quicksand. Get real. Banks already ignore any medical bill negatives on a credit report. Horse’s mouth on that one.
Someone pointed out moral obligation of assuming the debt on the house and agreeing to pay off that debt. Who made a debacle of housing prices? Not the person who bought the house and cleaned it all up with the best of intentions.
Screw the banks. They colluded with the governments to steal from the citizens leading to this mess. This is how you walk away:
https://www.stephensnyder.com/eStore/fcreport/
This is how you scrub your credit reports:
http://www.allenmichael.com
Fight smartly!
I am currently looking for a place to rent in L.A and all landlords do check credit. One landlord told me the minimum score is 650. I had another place tell me they wanted to see the balance in my checking and savings account too.
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