FICO Declares: We're Still Relevant, Really!

The Austrians over at Mises are covering a MarketWatch story about the damage of strategic default to your Credit Score. There are so many layers of B.S. here I don't even know where to begin.

I guess I'll start with the Fair-Issacs scaremonger warning everyone of the dangers of strategic default because of the credit score hit. The scary begins with a <gasp> 140 point drop in your score followed by a stern warning about how discriminating banks are these days.

Fannie, please!

Banks aren't discriminating. They just aren't lending. The halcyon days of securitizing unlimited loans are done. It's easier for banks to just keep money in their reserves and make interest, risk free, from the FED. Then there are the cherry fees they are collecting from distressed checking customers. They don't have to put anything at risk for those billions each year. The 720 or 580 credit score is irrelevant at this point. Everyone is too risky for a measly 3-4%. Fair-Issacs is trying to convince us that they matter. They need more $12/mo credit monitoring customers and $29.95 triple score buyers.

It's a waste of time. The FICO is screwed because banks don't need to lookup and when you got choose between eating and paying the mortgage (let alone credit monitoring) - you are buying the food. Especially when 20% of mortgages are now underwater. FICO needs us to believe that we'll be eligible for more debt if we keep our number looking good by not being one of the strategic defaulters.

But haven't we basically figured out that we don't really want all that debt? Didn't the housing-bubble/mortgage-backed/non-modifying-modification/robo-foreclosure/forged-document/fraud-flash-crash leave a lot of Americans deciding to get off the debt game? So what difference does a FICO score make? Mises makes the point:

So, even if you had to pay another $10 a month for phone and a little more for insurance the thousands saved each month not feeding an underwater mortgage is still worth it.

And this is where I scratch my head with the Austrians. Their whole piece seems to be an encouragement for people to up and walk away from their homes and mortgages. They've been recurring this theme for a while now. I don't have a problem with strategic default, per se. But I'm not going to argue for it in an open forum.  It's a decision that shouldn't be made cavalierly. Encouraging anonymous readers toward it just doesn't make sense for a blog representing one of the foundational figures of Austrian Economics. It's the kind of thing the Keyensians would point to as a sign of the unseriousness of the other side.

But then again, the Keyensians want to inflate away those mortgages. In either case, FICO is an anachronism from the era of personal debt bubbles.