« Wikileaks founder costs Bank of America nearly $4 billion, suddenly lands in jail | Main | Visa, MasterCard stocks plunge as Fed releases new rules to cut debit fees »

December 13, 2010

One good reason you should walk away from your mortgage

Keysinhand
One of the most common questions or requests for help that I receive goes something like this:  “Kevin, my home is severely underwater?  Should I walk away?  If so, how will a mortgage default affect my credit score?”

Many people who seek my advice on this matter aren’t in dire financial straits.  They neither have taken on too much debt nor have been reckless in their finances.  Contrarily, they have been reasonably good stewards, but worry that they are in a terrible deal, one that won’t get better anytime soon. 

I never answer this question directly, giving only information to help people make an informed decision.  Everyone’s situation and values are different.  However, new information published today strengthens the decision to walk away from a mortgage in cases where homes are underwater.

Almost two years ago, I wrote a prophetic article “Fair Isaac Corporation (FICO) increasingly irrelevant” in which I posited that banks would rely less on credit scores and more on other subjective factors to assess creditworthiness.  It appears that this prediction is a reality, as consultants have created new categories to help banks focus on potential customers who, based on a credit score alone, would be too risky. 

As reported today in The New York Times, these new categories (in order of most to least creditworthy) are “strategic defaulters”, “first-time defaulters”, and “sloppy payers”.  They help creditors distinguish between consumers who have the same or similar FICO scores.  

What does this mean? It means that those who walk away from a mortgage a.k.a. “strategic defaulters” have newfound hope of ascending from the depths of credit purgatory sooner than seven years. According to The New York Times article, strategic defaulters are those “whose credit scores were damaged because they walked away from a home when its value dropped below what was owed on the mortgage. These borrowers made a bad bet on real estate but may otherwise be prudent risks because they make a good living.”

So, in short, this new information will help people solve their moral conundrum of whether or not to walk away from their mortgage.  But, as I often say, this game is always changing. What seems like hope today could be horror tomorrow. Make sure you consider all the possibilities and consequences of such a crucial financial decision.

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

According to CoreLogic data, 10.9 million residential properties were underwater in the second quarter of this year, and Zillow estimated that 28.6 percent of all single-family homes were underwater in the third quarter. I'm still hoping that those homeowners will be able to catch up with their payments in a few years' time.

Consumer rights need to be protected. Stay away from abusive firms that doesn't do any good for your mortgage.

You're kidding me, right? What do you think it will do to the housing market and economy at large if even more people with good incomes simply walk away from their contractual responsibilities because the situation no longer favors them? You realize that SOMEONE ends up paying in the end and that it's usually other homeowners and/or taxpayers, right? I feel bad for people who risked and lost, but if people don't have to bear the consequences of being on the losing end of a bet then we all suffer. If no one "loses" then no one "wins" and the economy stagnates at best, spirals downward at worst.

(btw, I'm not talking about people in tragic circumstances. The author clearly states that he is talking about people in otherwise good financial positions.)

The comments to this entry are closed.

Follow up on Twitter!





About Me

Greetings! I’m Kevin D. Johnson, a business owner who has recently assumed the role of consumer advocate and internet activist. Atlanta, Georgia is my home.

My Story

Upon returning from my wonderful honeymoon in Jamaica in October 2008, I received what I thought was an ordinary American Express bill, but to my surprise it was a disappointing letter informing me that my credit line was reduced by about 65% for a highly suspicious and discriminatory reason. Considering my excellent credit score and pristine payment history, it just didn’t make sense. However, what does make sense are the unfair and insidious policies that I have uncovered when asking why. It is time to change them.

Good Morning America tells my story.

The Goal

I created this web site to document and share my challenging journey to change what is wrong, unfair, and unjust in the credit card industry. The ultimate goal of this web site is to inform consumers of ways to stand up for themselves against treacherous business practices and to educate consumers about how to improve their credit. Finally, I hope to encourage a more open dialogue with credit card companies about their policies–good and bad.

Success

I am proud to say that this blog's unyielding demand for change led to an important amendment in the final Credit CARD Act signed by President Obama on May 22, 2009. Despite this major accomplishment, there is still more work to be done.

View video of bill hearing in Maryland

Testifying at a bill hearing in Annapolis, Maryland

Speaking Engagements

In an effort to educate as many people as possible about financial management, especially about how to manage the current credit crisis, I have begun to speak around the country at colleges, universities, corporations, chamber of commerce meetings, congressional hearings, trade organization meetings, etc. Having acquired a wealth of information that will help to empower people and to improve their financial future, I feel that sharing this information is the least I can do to make a positive impact. For information on my availability for speaking opportunities, please send an e-mail to Jennifer Silverman at jennifer@silvermanworldwide.com.


Speaking at a university

Disclaimer

All information provided on NewCreditRules.com is provided for information purposes only and does not constitute or substitute for professional financial advice. Information on NewCreditRules.com is subject to change without prior notice. Although every reasonable effort is made to present current and accurate information, NewCreditRules.com makes no guarantees of any kind. This web site may contain information that is created and maintained by a variety of sources both internal and external. These sites are unmoderated forums containing the personal opinions and other expressions of the persons who post the entries. NewCreditRules.com does not control, monitor or guarantee the information contained in these sites or information contained in links to other external web sites, and does not endorse any views expressed or products or services offered therein. In no event shall NewCreditRules.com be responsible or liable, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any such content, goods, or services available on or through any such site or resource.

Popular Posts

  1. Credit CARD Act contains amendment inspired by this campaign

  2. Bankers Vow Revenge

  3. Republicans less likely than Democrats to have too much debt?

  4. Credit card bill won't outlaw redlining

  5. Create your own data mining strategy

  6. Top 25 subprime lenders behind the mortgage meltdown

  7. President Obama’s bad idea

  8. Bank of America gets a new chairman: my good friend

  9. Should the rich pay higher interest rates?

  10. Scam alert: Avoid debt relief and credit repair firms

  11. Do you know your medFICO score?

  12. Kevin, you're "LOOKING for discrimination"

  13. Woman denied credit due to blacklisted mortgage company: Bank of America

  14. Video of Maryland bill hearing against “blacklisting”

  15. A comprehensive list of "toxic" mortgage companies

  16. Speaking engagement brings a pleasant surprise

  17. Credit card securitization encourages fee-based profit model

  18. Everything bad about the credit card industry exposed

  19. The Credit CARD Act is great, but not strong enough

  20. Companies cancel cards of responsible customers

  21. What’s your credit score, President Obama?

  22. Fair Isaac Co. will no longer sell Experian-based credit scores

  23. Why merchants suffer just as much as consumers do (Part I)

  24. Big defeat for consumers, small victory for American Express

  25. American Express says it has changed its discriminatory policy, but don't be fooled

  26. What’s your horror story? Do you have praise for a company?

  27. Beware: These stores could harm your credit! (Part II)

  28. Beware: These stores could harm your credit! (Part I)

  29. Major banks cope with shame of being on welfare

  30. What affects your credit score


Great Resources

  1. ChangeInTerms.com

  2. Complaints.com

  3. ConsumerAffairs.com

  4. Consumerist.com

  5. CreditMattersBlog.com

  6. CreditSlips.org

  7. DefendYourDollars.org

  8. Epinions.com

  9. GotaClassAction.com

  10. My3Cents.com

  11. PlanetFeedback.com

  12. RipoffReport.com
* List provided by ChangeInTerms.com.


Selected Media Coverage



Powered by Johnson Media Inc. and consumers who want to make a difference.