Who walks away from mortgages?
Surprise! People with the highest credit scores
Conventional wisdom would seem to dictate that someone with an excellent credit score is less likely to walk away from a mortgage than someone with poor credit.
That's not so, syndicated real estate columnist Kenneth Harney writes in a story The Washington Post headlined "Good credit scores, deadbeat choices." In fact, people with excellent credit scores are 50% more likely to "strategically default" on their mortgages -- intentionally walk away -- than are lower scoring borrowers, according to a study by credit bureau Experian and consulting firm Oliver Wyman.
Harney reported these findings from the study:
- Strategic defaulters often go straight from perfect payment histories to making no mortgage payments at all.
- Strategic defaults are heavily concentrated in where home values have plummeted in recent years, such as California and Florida.
- Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances.
- People with credit ratings in the two highest categories are far more likely to default strategically than people in lower score categories.
Harney interviewed Piyush Tantia, a principal researcher on the study, who said the homeowners with high credit scores appear to see walking away as the most practical alternative under the circumstances.
The column doesn't discuss the merits of a short sale vs. giving the lender a deed in lieu of foreclosure vs. letting the house go into foreclosure. Nor does it explore why people with excellent credit are more likely to walk away than those with poor credit.
"The only ‘asset' many subprime borrowers have is their home,'' he wrote. "Although that asset has negative value, the homeowner may have nowhere else to go, especially if they have to put up a month's rent plus a 1-2 month security deposit in advance to rent."
In contrast, the high-scoring homeowners may have other assets and less emotional attachment to the home, plus can more easily rent another home.
"Also note the psychological factor about 'losing the only thing I ever had' for the buyers with lower credit scores," he writes.
MyBudget 360 notes that more strategic defaults are ahead in housing bubble states as option ARMs, adjustable rate and interest-only mortgages reset, confronting homeowners with higher payments on homes that aren't worth the mortgage balance.
"And you can put yourself in the shoes of someone who bought a home at the peak. Say you and your spouse bought a home in a bubble market for $500,000. Deep down, both of you felt that housing would never go down. This view was widespread. You saw for nearly 5 years homes appreciate by 10, 15, and 20 percent per year. At the very worst, you would be able to sell your home for $600,000 or $700,000 in a few years when your loan recast.
"Well, your home is now worth $250,000. It may never regain that peak value. Your payment will jump from $1,500 to $3,000. You can rent a similar place for $1,300. What do you do? Many are simply electing to walk away. In a state like California with 12.2 percent unemployment this decision might be made also by necessity. Sure, they can make the payment but how much of their budget is it eating up?"
Mark Gimein at Chumpchanger believes that walking away in that situation is absolutely the right thing to do
"In story after story about the foreclosure crisis, you will find the implicit idea that borrowers who can afford to pay their mortgage should keep on paying it no matter how much their house sinks in value because they have made a promise to pay and to do otherwise would be an abuse of the system," he writes.
"Propagating this idea is good for lenders and probably good for taxpayers, but basically, it's nonsense."
Liz Pulliam Weston notes that the decision about whether to walk away is only a moral issue if you have a choice. And she offers three key questions to ask when deciding whether to hold on to your house.
What's your take? Is it always wrong to walk away from a mortgage, even if continuing to pay will deplete your savings? What if it depletes your retirement funds as well? What if you lose your job and can only pay by running up credit card debt? What if you're divorcing or a spouse has died? Should someone continue to pay a $500,000 mortgage on a home that's now worth $250,000? Or are there times when walking away (or doing a short sale) is really the best financial decision?
And what does the fact that people with the very highest credit scores are more likely to walk away say about the credit scoring system? Or are they just showing that they are, as their scores indicate, prudent when it comes to money?
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