It’s been a while since there’s been a big flare-up in the question of whether you should default or not default if you’re underwater on your mortgage.
We won’t rehash the fight right now, but a new study from FICO (here) focusing on strategic defaulters confirms: strategic default is the behaviour of responsible individuals. The Washington Post has a good summary of it here, but this chart says it all.
Strategic default is the domain of the upper ranges of credit scores. Regular old nonstrategic default is where the lowers hang out.
The purpose of the FICO study was to help lenders identify those who are likely to walk away, and the report certainly doesn’t advocate the practice.
Indeed, note the authors:
Consumers who commit strategic default can see a substantial hit (150+ points) to their credit
score. Lower credit scores not only mean higher interest rates and/or more restrictive terms
and conditions for other types of credit, but can affect insurance premiums and a landlord’s
willingness to accept the consumer as a new tenant. In states that allow recourse, servicers that
sell a foreclosed property for less than the amount owed on the mortgage can still pursue the
defaulter for the difference. And the consumer’s ability to purchase another home is drastically
affected: In June 2010, Fannie Mae announced that strategic defaulters will be barred from
Fannie Mae loans for seven years from the date of foreclosure.
But just listen to the characterisitcs of strategic defaulters:
• Better FICO® Score (good previous credit history)
• Lower utilization (see Figure 2), less overlimit on credit card (better credit management)
• Less retail balance (spend money carefully)
• Shorter length of residence in the property (less attachment)
• More open credit in the past six months
Sure sounds to us like the group of strategic defaulters is a pretty good group to be in!
Yes, you have to be aware of the risks, and you will probably take a hit on credit and all that stuff. But in the future, as more research like this is done, it seems like it will be obvious that strategic default does not signal to future lenders that you’re irresponsible.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.