Credit agencies responding to 'shocking development' - credit elites walking away from debts

[Liberal_in_LA]

Walk-aways leading to big changes for all borrowers' credit scores

By Kenneth R. Harney
Friday, November 5, 2010; 9:01 AM

With foreclosures soaring - and homeowners with unblemished payment histories abruptly walking away from their houses with no warning to lenders - the two major producers of credit scores have begun changing how they evaluate consumers' risks of default. The revisions could touch you personally the next time you apply for a loan.

Overall, credit industry experts agree, consumer creditworthiness has deteriorated in the United States since 2006, especially among what used to be considered the credit elite, people with the highest scores. For example, a study earlier this year by VantageScore found that the probability of serious delinquency, defined as nonpayment for 90 days or more, had increased by 417 percent among "super-prime" borrowers between June 2007 and June 2009. Default risk during the same period rose by 406 percent for the second-highest rated category of "prime" consumers, and nearly doubled for those at the "near prime" scoring level.

"The driving force behind ," said Sarah Davies, VantageScore's senior vice president for analytics and research, is the "significant change in consumer credit repayment behavior" that began during the housing bust and recession.

Not only are borrowers who previously were rated outstanding credit risks far more likely to default today, she said, but many homeowners are defying long-standing credit industry assumptions by going delinquent on their first mortgage payments while simultaneously continuing to pay their credit card balances and second mortgages on time. Strategic defaults - walkaways - by high-score borrowers also have been an unexpected and shocking development, she said.

http://www.washingtonpost.com/wp-dyn/content/article/2010/11/05/AR2010110502133.html


To adjust its statistical models to these new realities, VantageScore says it conducted intensive research on 45 million active credit files obtained from the databases of its joint-venture partners, Equifax, Experian and TransUnion. The research examined the same files, with personal identifiers removed, during set periods between 2006 and 2009 to capture emerging behavioral patterns associated with defaults on various types of credit accounts. The resulting VantageScore 2.0, which is expected to be rolled out nationwide to lenders in January, focuses on the subtle warning signs of credit stress that might have been missed earlier. And it rewards or penalizes consumers with higher or lower scores than they would have received before.

Joanne Gaskin, director of mortgage scoring solutions for Fair Isaac

[annabanana]

1. Yeah.... "shocking". . . . .

Those nervy proles.. acting like banks and financial institutions. .

[dkf]

2. Why would you pay a second mortgage and not the first mortgage?

[jpak]

4. If you moved to take a job out-of-state, bought a new house but could not sell your old one?

my guess

[dkf]

But why would you pay on the second? Why not default on both the 1st and the 2nd.

[TBF]

7. Because you need the second one to live in, so you just default on the first. nt

[dkf]

10. Doesn't defaulting on the first or the second lead to the same thing?

Foreclosure? It uses the same house as collateral.

[AmBlue]

11. We're talking a second mortgage on the same property as the first....

,,,aren't we? That answer does not compute. I'll ask again: Why would someone pay their second mortgage on their home, but not pay their first mortgage?

[TBF]

12. No I thought we were talking about 2 different properties. nt

[Yo_Mama]

41. If First Is Non-Recourse, Second May Not Be

In a lot of states, you are protected against a deficiency judgment on a purchase money mortgage or a straight refi (no new money) of that purchase money mortgage.

So if you bought with a first and then later took a home equity loan or a HELOC, they can foreclose on you for not paying the first but they can't pursue a deficiency judgment and take other assets or garnish earnings. But the second could, so the borrower pays the second off but defaults on the larger first.

It's called "strategic default".

[laughingliberal]

43. Exactly! nt

[elehhhhna]

21. in California, some(clever, imo) people used the 2nd to make the downpayment ona cheaper

home when they realized they were underwater on the first one. Once the 2nd property was selected and closed on, they turned int he keys on the first one. Gotta keep that credit line open and clean while looking for new devalued digs.

[Yo_Mama]

48. That is not what this article is referring to

In the industry, that would be another first mortgage.

The credit scoring companies looked for markers that indicated that people were defaulting not because they didn't have the money to pay, but as a strategy to cope with the RE crash.

And a lot of people find themselves with two houses and default on the one that is not their primary residence, although you are quite correct that a lot of people deliberately bought another cheaper house and then defaulted.

However when a person pays their second (recourse) mortgage and doesn't pay their first, it's pretty much proof that they have assets they want to protect but they just want to get foreclosed on and get out of the home without being chased for debt. It's a way to hand back most of the debt without much repercussions.

[applegrove]

22. Because their first house was more expensive and has thus lost more value. They owe much more than

their house is currently worth. So they cut the loss of what they have already paid in mortgage fees and walk away from the rest. Maybe they live in their second home. Likely it is some summer or winter retreat and has not lost as much value as their regular home. Maybe the rate the mortgages in wealthy vacation home areas has not gone down as much as elsewhere because much of the rich can weather this storm. But some of them bought new houses at the height of the market and face a loss. Why not just cut your loses and walk away.

[Statistical]

46. 2nd mortage tends to mean a secondary mortgage on the same house.

aka you have a primary mortgage, you tap the equity and gain a SECONDARY mortgage on the same property.

If someone has a 2nd home it would be another primary mortgage.

[nilram]

23. Whoever holds the second mortgage typically doesn't want the owner to default --

If the house is foreclosed on and sold, typically at a lower amount than the mortgages, the holder of the first mortgage is going to get most, or all, of the cash. If the second mortgage holder is being kept current, they then are even less motivated to co-operate on foreclosing the house. Now, as to whether or how the holder of the second mortgage can block a foreclosure, I don't know, but I think this is the outline of the situation.

[muriel_volestrangler]

27. That makes some sense - thanks (nt)

[kenny blankenship]

3. If rules don't matter to the Great & Powerful

little people eventually take notice.

[malaise]

9. Ding Ding

We have a winner. Stiglitz is correct - the rule of law no longer exists.

[Name removed]

14. Deleted message

Message removed by moderator. Click here to review the message board rules.

[SammyWinstonJack]

16. Yep. nt

[bemildred]

25. +1. nt

[sendero]

30. Exactly..

... a person would have to be a fool to continue to pay for a house that will never again be worth even the mortgage amount.

It's a business decision, banks make them every day but god forbid a working man make one.

[MattBaggins]

34. Ding Ding Ding

It's not personal It's just good business.

How many times to we here that little number? Yet when the little guy figures this out and uses it to his advantage; the big wigs want to preach to us about "responsibility".

[laughingliberal]

44. There you go! nt

[Spazito]

5. Huh, go figure....

when one's credit score was rated higher if one had MORE credit available, credit that did nothing more than allow the 'elites' to get further into debt when all is said and done instead of basing it on actual assets, cash flow, etc.

When an economy is built on credit aka accumulating debt rather than actual assets the only thing shocking is that the credit agencies are "shocked", imo.

[laughingliberal]

45. "the only thing shocking is that the credit agencies are "shocked", imo."

Yep. They thought they had the proles sold on that idea or moral obligations. Once we saw how seriously they took their moral obligations after the bailouts, it became a damned lot easier to walk away.

[Dappleganger]

6. Making strategic business decisions just like the banks.

[Ikonoklast]

29. Yep. Letting an unsaleable, unprofitable division fail on its own.

Loading it up with as much corporate debt of the parent that they can, then walk away from it, letting the lender take it in the neck.


All prudent and acceptable by our Good Corporate Personhoods, who only do things in the best interest of...not us.

[Gormy Cuss]

8. Reality check on those humongous percentages....

From VantageScore's own study at link below, that enormous increase in the risk for super-prime borrowers went from 0.12% in 2007 to 0.62% in 2009. "Super-prime" borrowers comprise only 15% of borrowers.

Prime borrowers on the other hand went from a risk rate of 0.83% in 2007 to 4.2% in 2009 and they comprise 48% of borrowers.

So while VantageScore and Fair Isaac do need to tinker with their scoring models to reflect the new reality, the lowest risk borrowers are still very low risks.

http://www.vantagescore.com/research/creditworthyconsumers/

[sendero]

32. A percentage increase like that is significant..

... when the probabilily of payment was previously assumed to be approaching 100%.

I expect a WAVE of "strategic defaults" as more and more people figure out what a scam this entire game is, and as housing prices fail to stabilize.

How do you justify paying for a house that is seriously underwater? It makes no sense.

[Gormy Cuss]

33. Significant, sure, but the loss rate is still low in relative and absolute terms.

The "super-primes" risk is now just about the risk for prime borrowers in 2007. As I noted before, that does mean that the scoring algorithms need adjustment, but it's a much more alarmist headline to describe it as the percent of increase rather than looking at the actual risk rate change.

[sendero]

35. I agree that ..

.... without examining the actual numbers one could reach the wrong impression.

But I'm sure you know that these bundled securitized mortgages were leveraged 40, 60 even 100 times.

When something is leveraged 100 times losing 1% of its underlying value renders it worthless. THAT's why this is a big deal - they expected the sub primes and Alt-As to tank, they did not expect these to.

[Gormy Cuss]

36. Good point. n/t

[xchrom]

13. I can't believe I know of people doing this &

The holders of their 2nd mortgage are helping with
Re-negotiating on the 1st mortgage - which was the borrowers
Intent.

And they are getting more credit extended to them in the
Mean time.

But yes - they are following the examples set by
The banksters and financialists.

[Waiting For Everyman]

15. All risk rating is a crock and just an excuse to increase costs to consumers.

From securities rating down to individual scores, it's all just another big con and ponzi scheme. It doesn't predict risk, and it's not a premium for risk, it's only an excuse to charge higher interest or increase price. If it predicted risk or compensated for risk, then this whole economic disaster wouldn't have happened - losses would've been predicted and/or covered right? How many times do we have to pay for the same damn risk?

Credit scores are a means to blackball half of the public, and mechanize extortion.

I'm surprised the public wasn't up in arms about overthrowing this fraudulent system several years ago. It's a big part of the overall problem.

[Greyhound]

24. Bingo.

[bemildred]

26. +1.

People are not robots, they can actually behave differently if circumstances change, and they can perceive and pursue their own self-interest. Even better than banks sometimes.

"Title Insurance" is another one.

[sendero]

31. You are right..

.. one of the relatively unheralded results of this fiasco is that the savvy money doesn't put any stock in FICO scores any more.

They are about as good as Moody's, Fitch and S&P, that is to say, worthless.

[Lyric]

17. So in other words, high credit scores do not correlate with superior repayment trustworthiness?

This isn't exactly shocking news. Credit scores really are NOT good predictors of risk. Wages and job stability are a better predictor than a credit score ever could be.

The whole credit rating system is a scheme cooked up by the wealthy to screw the working people. It gives them legal cover to charge ridiculous fees and interest rates to the people who can afford them least (which leads to even MORE penalties and late fees), and to extend yet ANOTHER privilege to those who already have enough of them. Gotta keep those class lines nice and distinct!

[Statistical]

47. I guess you didn't read the article.

While default rates have increased they highest rated individuals have lowest default rates (<1%) although higher than they did previously.

Income != credit score. Trust me I know plenty of rich people with abysmal credit ratings. Income isn't even a metric in credit scoring model.

[Rex]

18. Shocking, yet they roll in the billions...fuck them I hope they all die

off! Money lenders (payday, visa) are evil scumbags, they fall in line with the warmongers, banksters and billion dollar white collar criminals. Credit cards are one of the worst inventions, ever. Now we have one more level of corporate bullshit to deal with...barf.

[Trajan]

19. Loan ? ... WTF is a loan ?

I haven't had a 'loan' in over 5 years ...

If I dont have the money (and generally, I dont ...), then I am not buying it ....

And, if my boss dont pay me any more ? .... Then I am not buying it either ....

Let's get real, for once .... Let the market find it's level WITHOUT consumer debt, or decent wages ....

Let the fat cats suffer when we stop buying their crap ....

[w4rma]

20. When banks break the trust of the consumer by jacking up rates without warning expect consumers to

walk away from that BS. When they do that the best way you have to fight them is to just walk away. Also, remember that any time they give someone bad credit marks on their report they are costing themselves future customers, too.

[SoCalDem]

28. Hey, it's just a "business thing"..nothing personal don't-cha-know?

Business types renege on deals all the time, and when legal costs to recoup are considered, they often walk away.

The Donald has declared bankruptcy more than once, IIRC.

When a "deal" is no longer a "good" deal, the wealthy cut their losses & walk away..

[tinymontgomery]

37. Okay help me out

I have a mortgage, took out 220,000 at 5.5 seven years now. Owe 150,000 some odd dollars, can't sell and know that the house is underwater at this point. Knowing that you can't give real advice and reading the discussion taking place and I am a geo bachelor in peoples opinion better to walk away to move the family so we're together?

[Rex]

38. I would think it depends on if you can make payments or not since

that is all the lending institutes are concerned with. Better to pay off a bad debt, if you can.

[tinymontgomery]

39. Can pay off

just an exercise in thinking. I am away from the family at least 4 days a week and see them only for about 30 hours on the week end. Just working the mind. Don't think I would walk away since we are lucky and at this point have decent employment. Thanks for the response.

[TwilightGardener]

40. Can your family come to you? Have you tried selling your house--have

you had it appraised or do you have a reasonable idea of what you'd get for it if you sold? If you can continue to make payments on it, it'd be a shame to simply walk away and fuck up your financial life--and will your situation get better in terms of housing or finances if you walk away? Will you be able to buy another house as nice as the one you're in for $150,000? (especially if no one wants to lend to you at a reasonable rate because of a foreclosure on your record?)

[tinymontgomery]

42. On market of six months

one walk through. As I said it is a exercise in thinking. Only 3 hours away from family. Really don't plan on walking away. Just asking a hypothetical question at this point. Thanks