@veracious wrote:
Thanks for the explaination, athensguy.
I understand all the points you made. I guess I was under the impression that those who choose this route
were going to walk away scott -free.
Anyone in this position will suffer severe damage to their financial position even if only for 7-10 years due to the
credit laws currently in force. However, who's to say a new scoring model wouldn't punish them more in the future.
After all FICO Labs is now considering how to predict their behavior. I would venture to guess, in the future,
FICO will compile the data and their customers will want this data to be considered in any scoring model of the future.
I feel sorry for anyone that is in this position.
FICO can change the model to punish walk-aways harder than a Real Estate default that isn't followed up with a Bankruptcy, but thanks to the ban on Universal Default, creditors not affected by the default can't really do all that much except deny requests for credit limit increases, or in AMEX's case, trigger a bunch of F/Rs.
If the labor market ever comes back, employers trying to fill positions won't stop caring if a hire strategically defaulted in their past. The mortgage is backstopped by an asset either way (the house) so the post-sale residual balance may wind up as a collection account, which a strategic defaulter won't be paying.
I doubt there is anything constructive that FICO can change in its scoring to convince people who are massively underwater to not default on the mortgage. I think mainly it stops here---FICO's data can convince the megabanks who is genuinely going to strategically default on them, and the banks can prevent it by offering modification deals to convince those that have an ability to pay to not walk away.
Remember the people who are strategically defaulting all have a means to pay. They have money. When they pack their bags and move out, the bank can play accounting tricks for a while, but at some point they will be forced to recognize the real value of the asset.
As long as a borrower is attached to that house, the bank does not need to write down the house, so the bottom line is safe. When you walk away from the house which is now a fraction of what it was once worth, that's an immediate hit on the bottom line... that asset has to be written down. They can put writing it down until the thing actually sells, but it's going to be written down in any case.
That's also why the banks have been holding on to a lot of inventory and have been selling it in chunks---if they put too much up too quickly, the overall market tanks and then they will have to write even more off.
That kills their stock value. That's why Citibank and BOA's stock is so lousy.
