Here's an eyebrow-raiser for you: FICO, the high and mighty arbiter of our creditworthiness (or lack thereof), dropped a press release the other day announcing "new and troubling findings" in stern, sober language.
The finding? People with good FICO scores are more likely to default on a mortgage than on their credit cards.
Now, I can see why a company that sells its credit ratings to mortgage issuers might see those findings as "troubling." But "new"?
Is it really news that people -- smart, responsible people -- are walking away from mortgages?
Not just a "subprime" problem
The phenomenon of people walking away from mortgages when they're severely underwater has been discussed at length in the last year, with some academics going so far as to question why more people aren't doing it.
It's easy to see why an expert might be puzzled: When you're paying a mortgage for a sum much more than the present value of your house, and there are good rental properties available for much less per month than your mortgage payment, walking away can seem like a financially responsible move.
This is especially true, as Fool Matt Koppenheffer pointed out recently, in states like Arizona where mortgages are nonrecourse, which means that the lender can't try to seize any assets other than the house itself. In those states, it really is possible to shed your house and mortgage and move on to a reasonably normal life.
And some otherwise financially responsible people are seeing that as a good choice: FICO's data shows that people with very high credit ratings -- FICO scores between 760 and 789 -- are three times as likely to walk away from a mortgage as they are to default on a credit card.
Of course, whether it's a good idea depends to some extent on your perspective. Certainly major mortgage issuers like Citigroup
But when a Wall Street bank like Morgan Stanley
But why keep paying the credit cards?
FICO seems surprised and troubled by the idea that people would default on mortgages while continuing to stay current on their credit cards. But I'm not. Think about it: Suppose you bought a house for $600,000 three or four years ago, but now it's worth $350,000 -- far less than you owe. You can make the payments, and do, but it's a struggle. When you see that you can rent a nice house nearby for half of what you're paying, you make the hard decision to walk away.
If you're a financially intelligent person, though, you'll have thought this through. Walking away will mess up your credit rating for several years. You won't be able to apply for new credit for a long time. But you want to continue to live as normal a life as possible. Keeping the credit you already have would be a high priority, wouldn't it?
And having just cut a big chunk out of your monthly spending by giving up the mortgage, paying down the credit cards is easier than it has been in a long time. Of course that's going to be a priority. New credit rules may have curbed the worst tactics, but the big card issuers like JPMorgan Chase
What's really upsetting FICO
It didn't take much thinking for me to figure out why someone with a good credit rating might default on a mortgage but not a credit card. And it shouldn't take much more thinking to figure out why this is, as FICO says, a departure from historical norms -- so was the last decade's run-up in home prices!
I think what's really upsetting FICO is this: Their much-ballyhooed credit scoring system isn't doing a good job of predicting who is and isn't a good mortgage risk. Mortgage lenders may be going back to actually hand-screening credit applicants, having an actual person look at the borrower's ability and willingness to make payments, and foregoing the whole FICO-powered "instant credit" process in the future.
Lenders actually evaluating credit risks. Imagine that.
Looking for a savvy approach to your own debt? Dan Caplinger has the five-day fix for your finances.
