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Source link: http://archive.mises.org/17208/should-those-underwater-keep-paying-to-protect-credit-score/

Should Those Underwater Keep Paying to Protect Credit Score?

June 6, 2011 by

In an LA Times piece about underwater homeowners stuck in North Las Vegas, reporters Ashley Powers and Alejandro Lazo quote heavy-equipment operator Charles Mills, “We talked about it: What can we do with the house?” Mills said. “Nobody’s going to buy it. Nobody’s going to rent it. If we walk away, my credit’s shot. We’re stuck.”

The unemployed Mills has a job opportunity waiting in Oklahoma but doesn’t think he can leave the house he bought in 2006 for $308,500 that will fetch less than $106,000 today.   Mr. Mills has company as 80% of North Las Vegas homeowners owe more on their mortgages than their homes are worth.

“Walking away, it does wreck your credit history for a while and you can’t get another mortgage for seven years,” said Richard Green, director of the USC Lusk Center for Real Estate. Defaulting also makes it harder to rent an apartment. “The other thing is, there is also some sense of obligation to repay your bills,” he said.

But is Mr. Mills right that he should stay strapped to his sinking home to save his sacred credit score?

Sure, Fannie Mae claims it is locking out strategic defaulters for seven years. But how long will the government-owned mortgage buyer maintain that policy?  After all, a new study by TransUnion shows that mortgage-only defaulters are good credit risks.  Julie Schmit writes in USA TODAY,

TransUnion’s research shows that those who only default on mortgages are less likely to then default later on new car loans or credit cards than are people who default on mortgages and at least one other debt at the same time.

This study confirms the findings of credit scoring firm FICO.  Strategic defaulters tend to be more savvy about credit, using credit lines less and having high credit scores (prior to walking away).

TransUnion found that credit scores bounced back quicker for mortgage-only defaulters.

So while many people paint strategic defaulters as ethically challenged, the numbers would reflect that these folks are anything but.  They honor their debts except when their fiduciary duty to their family takes precedence.

So as Steve Chaouki, TransUnion vice president says, those that walk away “are less risky than they appear.  Lenders will want to lend to these people in the future.”

Meanwhile the Mills family has walked away from two car loans but are determined to hold on to their house.  “The cars, those are toys. Those are material things,” Mills said. “This is home.”

 

{ 18 comments }

Sarah June 6, 2011 at 11:31 am

My husband and I own a home in North Las Vegas, and it is worth about 200,000 less than what we paid for it. We are currently going through a foreclosure, and at first we were very concerned about our credit score. Now we realize that we simply can’t throw good money after bad in an attempt to keep some arbitrary number high. Breaking away from the “credit score god” has been very good for us emotionally and financially.

HL June 6, 2011 at 11:40 am

As Dave Ramsey says, credit is bad anyway – a gateway to modern-day indentured servitude. I know so many who are hardly better than serfs, with the government and banks getting pretty much all the disposable income. Toss in the underwater house and one has to wonder if there is a decision to be made, or if it has been made already for the hapless consumer.

In the context of our housing tsunami, I tell folks to seek the higher ground and leave all that stuff behind. A bad credit score can be a good thing. (As a side note, the credit scores of bankruptcy filers tend to bounce back lickity split compared to those who just walk away and languish in the bad debt pools.)

Bogart June 6, 2011 at 11:59 am

The banks and government try to make a mortgage default seem worse than it is. At worst you will have to pay a few percentage points above the rate for prime borrowers and probably have to kick in more up front. So instead of paying 10 grand up front for a 30year fixed rate of 4.75% on a 200K home the defaulter will have to pay 20grand up front the same term and pay 6.75% interest.rried and have the home under one spouse then you are But the advantage is that you will get a whole lot more home for the 200K than you had with the 300K.

J. Murray June 6, 2011 at 12:17 pm

“This is home.”

No it’s not, Oklahoma will be. Home is the place you go to recharge and should be close to your place of employment. That’s not a home anymore, it’s a headache.

Ray Rock June 6, 2011 at 12:52 pm

It all depends on where you live. If you live in a state where a mortgage is a recourse loan you can walk away from the house, but you may not be able to easily walk away from your obligation to repay the loan. After the foreclosure you will still owe the difference between what the house sold for and the amount of the loan with all the fees and penalties and interest that accrues along the way.

It may be a relief at first, but that may not last long once the bill collectors track you down. In one article I read a bill collector appeared several years later. They were doing periodic credit checks and when they saw the person was in a better financial position they showed up demanding their money. They also know the various state laws and will make sure they appear and file a lawsuit within the time allowed in that state.

There are many long and short-term consequences to consider and they vary from state to state and can be different for different types of loans such as a primary residence or a second home etc. Make sure you’re fully aware of all the ins and outs or there may be some unpleasant surprises down the road.

prettyskin June 6, 2011 at 1:58 pm

Bill collecting will seem like a good start if someone is looking for a job. Hiring bill collectors, no experience needed!

Bill June 6, 2011 at 3:43 pm

Yes, this is true, but I would have to think that dealing with this down the line, when you truly are in a better situation, and probably able to negotiate with them and reach a settlement is much better than being in these upside down situations. Besides, you have to think about this actuarially, so to speak. In other words…..put a probability to it. I do not know….but i have heard that something like 5% of these loans are being chased down. So if you owe 100k, and the house sells for 40k, figure you are on the hook for .05*60K.

Walt D. June 6, 2011 at 2:01 pm

Amazing. Bank of America, Wells Fargo, Cititurd would all be insolvent if they were marked to market. Yet they look down on consumers who have credit problems.

Bob Roddis June 6, 2011 at 4:30 pm

I can understand a moral obligation to repay your Aunt her life savings that you borrowed. But is there really a moral obligation to repay a bank for a loan it created out of nothing?

prettyskin June 6, 2011 at 5:12 pm

Very easy to judge in hindsight but not in real time. When the loans were being handed out, the borrower was not concerned about the moral obligation. Now, that it is pay back time morality is front and center with the foul play of fiat money. It takes two to tango; both are at fault.

Virginia Llorca June 6, 2011 at 5:39 pm

So it really becomes the lesser of two evils. That is where how much you care about your aunt would come into play and hopefully shade your decision. And situational ethics is a deep and many layered subject.

Virginia Llorca June 6, 2011 at 5:04 pm

Simple answer to the titled question: No.

Your “moral” obligation went right out the window when forces beyond your control messed with the market while you were putting that new tile in the bathroom.

Ohhh Henry June 6, 2011 at 10:54 pm

Is it true that most large companies do credit checks before hiring someone? Can someone lose their job or have a job offer rescinded if their credit is bad?

It occurred to me that the housing crunch, if not cleared up, will severely limit any attempted recovery because people will not be able to move to where the jobs are, when and if hiring begins again. Generally speaking, people will only move to another state or across the country if they have a really good job lined up, i.e. at a large, established company. But if their house is underwater they won’t be able to sell it. If they walk away from their mortgage their credit score will be damaged and the job offer may disappear, or they could be let go during the probationary period if either the credit score drops or if bill collectors start phoning them. And needless to say, the housing in their new community will not be reasonably priced, as long as banks and government are trying to artificially maintain the old prices, such as by offering relief programs and by keeping homes off the market that should be foreclosed and auctioned.

I can see gridlock developing, and in the meantime the country could go into a severe tailspin and not find the bottom until the standard of living is somewhere down around Argentina’s.

Ray Rock June 7, 2011 at 9:21 am

I Read an article a year or so ago about a whole bunch of federal employees being fired for situations like this. Their jobs required them to have a security clearance, but the government denied them the clearance because of a financial irresponsibility. Since a failure to obtain or maintain a security clearance was grounds for dismissal they lost their jobs.

If you are sued that will be a matter of public record that a basic background check will turn up and that may lead to not getting the job. An employer may view the person as a deadbeat or as irresponsible. They may also worry about them stealing company property or customer data or about bill collectors showing up at the place of business.

So yes, this can in fact cost a person prospective jobs.

Virginia Llorca June 6, 2011 at 11:07 pm

It is true about the credit checks, but such a large portion of the population is doing these deeds- in- lieu, etc. it will shift the paradigm. Already most banks ignore medical delinquencies, and that is from the horse’s mouth. And no bank or mortgagor or realtor is attempting to keep the prices as they were. Believe me, I am in a huge metropolitan Chicago area and it is whole new ballgame. Deed-in-lieu is supposed to have a lesser impact. Research.

I thought the Welsh community was very happy in Argentina.

Inspector Ketchup June 7, 2011 at 9:01 pm

You need a good credit score when you need to borrow money, that is when you are a poor financial planner.

Those who self finance and don’t need to borrow and prefer to save and have enough money before they buy something are those who the least need a high credit score and who are the most solvent.

Ironic, isn’t it.

Super Size Congress June 7, 2011 at 9:58 pm

Given the Fed is a private finance capital operating as a state protected monopoly ( Federal Sherman Act of 1890 made the idea of the Fed illegal.) Hence, the Jekyl island “founders” of the Fed were actually committing a felony.
“I believe that banking institutions are more dangerous to our liberties than standing armies . . . If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] . . . will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered . . . The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” — Thomas Jefferson — The Debate Over The Recharter Of The Bank Bill, (1809)After 2010, and 2009, the Fed succeeded in looting the US dollar (on the order of about a third of the cash money per year electronically printed), lowering labor reward or cost – depending on one’s point of view. Each of us has an obligation to gain or retain value in order to maintain our living standards in the US where manufacturing, professional work, and large quantities of capital (3 trillion US dollars) have been exported while interest rates are Fed set low while credit makes such capital inaccessible for most people. The question is how?
Ditch the dollar as an exhange of value wherever and whenever you can. A trip to Home Depot, Lowe’s, etc. show copper pipe increased over 50% in six months. Food is also an exchanged commodity whether you grow or wholesale it. As the Fed abandoned the US, much like the government in favor of multinational brokerage arrangements whether finance, commodities, real estate, technology or production. At least ditching the dollar avoids the ruse in the media game of your somehow gaining ground while the dismal reality is otherwise.

Virginia Llorca June 7, 2011 at 10:06 pm

And I am crazy about the fact that they don’t have to explain 9 trillion dollars in off balance sheet expenditures. But what if I pay my cable bill thirteen hours late?

Someone should have cloned Thomas Jefferson, naughty as he was.

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