by Broderick Perkins
DeadlineNews.Com
(10/21/2011) Erate Exclusive - Reacting, in part, to lost home equity and
forecasts of home price declines yet to come, a growing number of homeowners
may see more value in holding onto their credit cards than their homes.
More Americans are paying their credit card bills on time,
as more homeowners are letting mortgage payments lapse 60 or more days in
arrears, according to research by Experian, a financial information services
company.
Nationally, from 2007 to 2011, the number of credit card payments that
are 60 days or more overdue declined by 20 percent, the study found. In
contrast, 25 percent more consumers are paying their mortgages 60 days late,
according to Experian.
In 30 of the nation's largest metropolitan areas, the percentage of late
credit card payments decreased significantly. The percentage of missed
mortgage payments (considered to be payments 60 or more days overdue), rose
dramatically in 26 regions in the study, and improved in just four.
According to another report, keeping credit card accounts current while
letting mortgage payments fall behind, may be a well-planned, though
questionable, strategy for certain homeowners preparing for credit life
after foreclosure.
Selling the farm
The save-the-credit-card-damn-the-home behavior is common among those who
engage in what's called a "strategic default" -- purposely stopping mortgage
payments to induce foreclosure or a bail out. Many mortgage rescue programs
won't help those who are current on their mortgage, even if they are
"underwater" -- paying for a mortgage with a balance that's larger than the
home is worth.
Compared to other defaulters, strategic defaulters have not been in their
homes very long. To those short-timers, a strategic default may be a
no-brainer.
If they purchased their home at the height of the boom and suffered a big
value hit, they know they may not recover to the full purchase price of hour
home for years, if ever. Since they've paid into their investment for only a
few years, they have a smaller stake to lose than long-timers.
Without the burden of a mortgage payment defaulting homeowners have time
to stash away perhaps tens of thousands of dollars before the lender finally
forecloses. Later, a cheaper rental will cut their housing costs and build
in more savings. However, the booming rental market could throw a
wrench into their plans.
Keeping plastic
"Predicting Strategic Default," by major credit scoring
system architect FICO (Fair Isaac Corp.), found that strategic defaulters
aren't true deadbeats because they tend to use credit card credit wisely and
keep their accounts current.
• While more than 35 percent of non-strategic defaulters maxed out
their credit cards, fewer than 10 percent of strategic
defaulters did likewise. Holding onto existing credit cards, with unused
credit to fall back on, could come in handy after a foreclosure.
• The study also found strategic defaulters proactively shopping for
new credit card lines before they stop paying their mortgage. In the days of
waning equity and fears of job loss, some homeowners used the same strategy
to tap home equity before it disappeared or they were out of work. Stocking
up on new credit before defaulting acknowledges credit will be tough to come
by after default.
• Also, those who walk away from their homes and into foreclosure
are able to make calculated credit moves because they have higher credit scores. Most
strategic defaulters have credit scores above 620. Defaulters with a credit
score of 700 or more are more than twice as likely to be strategic
defaulters, Experian found.
The higher the credit score before default, the higher the score will be
after the 150-plus possible negative credit score hit that comes with foreclosure. For some,
that could put access to credit within reach, after just a few years or
sooner.
The FICO report wasn't designed to serve as a blueprint for strategic
defaulters. Any default is risky business for years to come.
However, the FICO report does indicate, in part, why on-time credit card
payments are improving and on-time mortgage payments aren't.
"The era of the strategic default is likely to be a phenomenon coming to
an end after 2012, when the window created by the Mortgage Debt Relief Act
of 2007 will be closed, whereby many taxpayers have been permitted to
exclude from income (by receipt of a 1099) the debt reduced and forgiven by
a lender in connection with a mortgage on a primary residence," said Nancy
Osborne, Chief Operating Officer of Erate.com, a Santa Clara, CA-based financial information
publisher and interest rate tracker.
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