Fresno Bee: Many Valley Homeowners Abandoning Mortgages

The Fresno Bee had a nice feature article on May 8 entitled “More Valley homeowners abandon mortgages”. I commented on the morality of strategically defaulting here, but this Fresno Bee article addresses more of the practical issues involved and the author seems to do a good job of answering all of the common questions. One question answered is the hit on one’s credit score from a foreclosure. This is what the article said on that:

Like any foreclosure, a strategic default leaves a scar on a borrower’s credit history.

Credit
counselor Dees — whose housing counseling program is underwritten by
an assortment of federal grants and grants from banking organizations
and other industries — said many of his clients are frustrated after
their bank has denied a plea for help, especially after so much news
about bank bailouts and government programs to modify loans.

“One
of the first things we explain is that you’re not hurting the bank by
walking away,” Dees said. “You’re only putting yourself in a worse
situation.”

While still a red flag, either a short sale — in
which a bank agrees to let the owner sell the home for less than the
balance owed — or a deed in lieu of foreclosure “look more favorable
on a credit report,” Dees said. “It’s much better to work with the
lender to get it sold the right way.”

Maddux and White suggest that the effects of foreclosure are overblown.

“The
perception is grossly misrepresented,” said Maddux. “The damage isn’t
as bad as people think — it’s about 100 [to 125] points on a credit
score.”

White said most people “can expect to recover from the
negative impact of foreclosure on their credit score within a few
years.” By renting for far less, they can apply the rest of their
mortgage payment to get ahead on other bills, he said.

With the number of people defaulting, I had assumed the credit impact could not be that bad, but I had not yet seen someone take a guess as to what the average hit was.
Categories: