Trust In FICO

One funny thing I have noticed is that all these well paid executives never imagined that anyone with a decent FICO score would consider walking away. In article after article industry experts and risk analysts are stunned people are doing what is best for them and their families for the immediate future - even if that might mean a hit to their credit and FICO score. My prediction is that as the numbers skyrocket bad FICOs for middle and upper incomes will become less and less of an issue. It will be what a tattoo was in the 1970s. Once just for those on the fringes, now it is they are sported by the nurses in my doctors office.

So today there is an article in the International Herald Tribune about problems arising when homeowners (should really say homedebtors) walk away.

... Rapid declines in home prices in many parts of the United States will soon leave as many as one in five borrowers owing more on their loan than the house will sell for, removing the single most powerful incentive to keep up with payments.

The phenomenon of "walkaways" or "jingle mail," so called because of the noise the house keys make in the envelope mailed to the bank, is hard to measure but shows every sign of gathering pace and having a substantial impact.

One in five borrowers under water. It is said that only about 2/3 of homeowners have a mortgage - so taking that into account then approximately 13% of all properties will be owe more than their house is worth. I wonder if the models ever took that into account...

Wachovia went so far as to change its models on how quickly loans will go bad in the face of what it called "unprecedented" changes in consumer behavior.

"I don't know where the tipping point is," said Don Truslow, chief risk officer at Wachovia. "But somewhere when a borrower crosses the 100 percent loan to value, their propensity to just default and stop paying their mortgage rises dramatically and really accelerates up."

If you are underwater AKA upside, one has to figure out how long it would take them to break even. As the property values spiral downwards people are even more underwater. The analysts need to look at various underwater points - 1%, 5%, 10%, 25%, and 50% underwater. I can not see anyone that underwater staying put - unless renting in the area is more expensive which does not seem to be anywhere. Since people have been encouraged to view their homes as a long-term investment and retirement fund it makes sense for people to walk away. The housing paradigm has changed drastically the last ten years - if a lender paid someone to take a house - with the did with some of these 100% with cash-outs what incentive is their to stay. If your home is worth 50% less than what you owe your credit score will rebound faster than your home value will. So what have the models based on...

He added, "It's almost regardless of how they scored, say, on FICO or other kinds of credit characteristics."

FICO, a credit score developed by Fair Isaac Corp., is one of many barometers of creditworthiness used in home lending to help predict the likelihood that a borrower will repay.

Oh, of course they placed all their trusted in the FICO score. Why would someone want to hurt their credit score - self preservation is stronger than caring about ones FICO score. Modelers used the FICO score to predict future behavior but how many ran those models on properties that lost 30-40 even 50% of their original purchase price or peak value.

... Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first-mortgage holders.

The impact of a new wave of defaults will also be potentially important. Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.

This is just for June, the longer and deeper the recession gets the larger and larger these numbers will become.

While few might shed tears for banks, this means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.

Why would anyone worry about the banks - when an investment bank was given a sweetheart deal on a Sunday afternoon. While any help to the individual homeowner drags on and on and includes subsidies for big business. Everyday it seems the Federal Reserve Board is coming up with new ways to help the banks (see here and here) - other than scolding the home-owners not to walk-away what has been done for the little guy? What will be done? And when?

... While borrowers acting in their own best interests really should not shock anyone, the costs associated will be just another unwelcome drag on the economy and finance until the value of U.S. houses stops falling.

The models should be recalibrated using what would be in the homeowner's best interest rather than than relying and focusing on the FICO score. Stories abound of people having problems getting in touch with the current owners of their mortgages, top that off with the lenders rejecting short sales or making them so difficult that people who are trying to do the right thing are not able to - and there are not many choices left. People with great credit and equity are upset about losing their HELOCs. Imagine how furious the people who played by the rules (at the time even if they were too loose) only to find out they are underwater and its getting worse everyday.