Having a Good Credit Score Might Make You More Likely To Default

by Darwin on July 16, 2011

It may come as something of a surprise, but statistics suggest that some of those people who default on their mortgage may not be in financial difficulty at all.

A report by the company Fair Issac, who created the FICO credit score rating, suggests instead that around one in three defaults are so-called ‘strategic defaults,’ whereby the homeowner voluntarily stops paying their loan.

Studies suggest that there are several reasons why an individual would voluntarily default on their loan. Firstly, it could be because the house is already in negative equity.

With the effects of the global economic recession, the real estate market has been struggling and forecasters suggest it may take a long while to recover.

So homeowners who have seen the value of their house reduce significantly know that it may not regain its price for many years. For some individuals, this is enough to want to default.

Many of the strategic defaulters are individuals who are above average in terms of wealth and could easily repay their loan if they so wanted, but consider their age a factor.

Many wealthier individuals are the more mature individuals who have received a professional income over their working life. They believe that if the house value takes decades to recover, they will then be in their twilight years.

These individuals can negatively affect their credit rating in this way because they will probably not need to use it in future. So these individuals find a second property to rent or purchase because prices currently are so low.

With the paperwork for the second property complete, they then default on their original loan. Although some people suggest there may be moral questions to be asked, strategically it does make some financial sense.

Then there is the rationale that although an individual could continue to repay their loan, it would eventually be repossessed or foreclosed at some time in the future when their savings dried up completely.

So instead of trying to keep up with loan repayments, householders put the money away instead, often into high-yield savings accounts or other financial products.

Homeowners know that it may be months or years before banks foreclose, so they continue to live in the property but save each monthly loan repayment.

Just consider how this money would mount up over time, even within the space of a year these individuals could save a significant sum. This sum could then be used as a down payment or deposit on a rented property or even a second home.

The financial company Experian believes from the findings of their research that strategic defaults are a practice that will spread. As more people hear about the method, more people will be tempted.

Experts believe that people are tempted to walk away because, in part, they blame the banks for the financial crisis and therefore do not feel obligated to pay back their loan.

So it seems that having a good credit score may indeed make you more likely to default on your mortgage. Many wealthy and financially astute individuals have already done so and it seems likely that more will follow.



{ 3 comments… read them below or add one }

krantcents July 16, 2011 at 11:43 pm

Although this was time ago (before the crisis) I knew someone who did exactly this. They bought a second property and then defaulted the first property. I remember at the time that I was shocked that someone would do that. Apparently, it is now a trend!


101 Centavos July 17, 2011 at 1:01 am

Well, count me as one who knows someone who is doing a strategic default. Wait, make that two people.


Debt Consolidation Nation July 17, 2011 at 9:27 pm

There is no non-recourse lending in Australia. If you default and there’s a shortfall the bank can legally pursue you for the difference. hence repos are about 0.1% of mortgages in Australia


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