Paying to protect credit score, from underwater

Should underwater home owners go down with a sinking home to save a credit score?

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.”

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