People With High FICO Scores More Likely To Default On Mortgage Than Credit Cards

A FICO  report released in February of this year reveals that people with high FICO scores (between 760 and 850) have a higher default rate on mortgages than on credit cards. From May through October 2009 the default rate for this group was .32 percent for mortgages and .12 percent for credit cards. This is an increase as compared to .08 percent for mortgages and .10 percent for credit cards in 2007.

 

No one really knows the reasons why people with such high scores are defaulting on their mortgages at a higher rate than their credit cards, but one only has to look at what is going on in the wider economy to surmise what some of those reasons might be.

Prolonged High Unemployment

A high credit score does not render one immune from job loss. Regardless of credit score, when a family loses a substantial amount of income, even a prime rate mortgage can become unaffordable.

Sense of Foreclosure Inevitability

Families who face financial setbacks and who are at risk for default and eventually foreclosure, may believe that there is little hope that they can salvage their homes. The dismal figures coming out of the President’s HAMP program have done little to inspire confidence in many American families.  For borrowers such as these, keeping up with credit card payments and therefore keeping those credit lines open, allows them to continue to use their credit cards for necessities such as food and other essentials.

Underwater Mortgage

A study done by economists at the University of Chicago, Northwestern University and the European University Institute found that homeowners whose mortgages where greater than $50,000 above their current home value were more likely to default even if they could afford their payments.

People who elect to stop paying their mortgage even though they can afford their payments are said to "strategically default." Such people might well continue to pay their credit card bills on time and not their mortgage because they’ve already made the economic decision to abandon their home.

Of all of the above reasons for this trend, probably the most important is unemployment followed by the underwater issue, neither of which any of the foreclosure mitigation efforts have addressed so far.

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