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.”