High Credit Score Mortgage Defaults Are Happening More Often

FICO, the creators of the credit scoring system used by the major credit bureaus, has issued a report stating that high credit scores does not necessarily mean that there is a lower risk of foreclosure. On the contrary, their research has shown that when faced with a financial crisis, people with very high credit scores are more likely to default on their mortgages as opposed to their credit card debt.

While tracking the default rate during a 6 month period in 2009, FICO found that the foreclosure rate among people with a 750 or higher credit score stood at .32%. That is a full .20% higher than the same group of people who defaulted on their credit card debt.
While this percentage rate was still considerably lower than the foreclosure rate of people with lower scores, FICO still finds this statistic a problem. They believe this is the first time, since tracking this type of information, that people in the higher scoring brackets had a higher rate of foreclosure than credit default. It is a trend that they will be closely watching.

People working in the housing industry believe that they understand the trend. When people find themselves in a financial crisis they will continue to pay down their credit cards in case they need them to purchase necessities. Regardless of financial trouble, people will still need to eat and purchase gas to go to work.
This trend does not include vacation home statistics. When defaults are tracked they only include the main residential homes of people. Many foreclosures are happening with second homes or vacation properties. As the economy continues to tighten all excess spending is decreased.

Another reason that many believe these high score defaults are happening is because of the decrease in home values. As home values drop and people become upside down in their mortgages they are more apt to walk away from the home and let it foreclose.
While the FICO report did not specify the trend to any particular state or region, their data did reveal that the northeast was far less likely to default on a mortgage than in anywhere else in the country. Their data also revealed though, the same area was 4 times as likely to default on their credit cards 5 years ago and now that number is only twice as likely.

People with very high credit scores receive the best rates from the banks and other lending institutions when they get a mortgage. Considered Prime or better, these mortgages have the lowest interest rates on the market and allow borrowers the most leeway when borrowing.

Borrowers with these super high scores, when defaulting, will find their great scores drop to the 600’s after the foreclosure takes place. Still, this score for many is still very good.

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