Bank of America Chief Says Strong Credit Borrowers Default

December 20, 2007 No Comments »

Bank of America chief executive Ken Lewis told editors of the Journal last week that he’s worried about borrowers with strong credit scores not making their mortgage payments if the housing market deteriorates further.

“There’s been a change in social attitudes toward default,” Lewis told the Wall Street Journal. “We’re seeing people who are current on their credit cards but are defaulting on their mortgages. I’m astonished that people would walk away from their homes.”

The latest housing boom was riddled with zero-down mortgages, first-time homebuyers, and scores of speculators who were looking for a quick flip, many of whom were not classified as so-called subprime borrowers.

But with little or no home equity, many of these borrowers will likely walk away and opt to send the house keys back to the mortgage lender, regardless of what their credit scores might be.

It sheds light on the mortgage industry’s reliance on the Fico score, which Fannie and Freddie began recommending in 1995 to measure a borrower’s ability to repay.

And could possibly expose the systems’ weakness as scores of seemingly good credit borrowers who purchased homes with no money down while stating both their income and assets begin to default.

Mark Zandi, chief economist of Moody’s Economy.com Inc., says credit scores don’t mean much in the current housing environment, and claims a better test now is how much equity borrowers have in their homes.

His reasoning makes sense, as the more equity a homeowner has, the less likely they are to walk away.

Perhaps it’s time to take a better look at the Fico score, which much like everything else, can be easily manipulated.

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