Strategic defaults hit consumers' credit scores

09.21.09
By Steve Monfort

A new trend brought on by the recession has lenders wary of consumers who are walking away from mortgages and other debts regardless of the damage this will inflict on their credit scores.

Various media outlets have examined the growth of so-called strategic defaults, which often involve people walking away from mortgages that are worth more than their properties.

Writing in a recent Washington Post column, Kenneth Harney notes that homeowners with the highest credit scores are actually 50 percent more likely to engage in strategic defaults than counterparts with lower scores.

The columnist also noted the strategic defaulters tend to stop making their payments abruptly, because they want to be rid of their properties, unlike distressed homeowners who want to save them. He also pointed out that there were about 588,000 of these cases nationwide in 2008, marking about 18 percent of advanced delinquencies.

A report on NBCBayArea.com cites California mortgage broker Peter Kovacs as saying that people are doing more of these defaults because they think it's "legal, socially acceptable and not having any consequences."

Those who do walk away from a mortgage can expect a blow to their credit scores for at least seven years. However, many people are apparently factoring this in as a reasonable penalty compared to the financial damage of being hundreds of thousands of debt on properties that have lost substantial value in recent years.

According to a Los Angeles Times report, those who do opt for a strategic default, can see their credit scores fall by about 140 or 150 points, along with having a negative impact on that score for seven years. The report notes that a bankruptcy will negatively impact a credit score for ten years.

The report added that thanks to the recession, more Americans are falling into the lowest category of credit score, while several million have tumbled out of the highest credit score category.

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Some consumers are opting to just walk away from their mortgages.