FICO recently released a study that claims they can pinpoint those who are prime candidates for strategically defaulting on their mortgage.
Strategic defaulters can be defined as those able to make their mortgage payments but unwilling to do, often because their mortgage is worth more than their property value.
Researchers at FICO have determined an ability to identify borrowers 100 times more likely to strategically default on their mortgages than others. Reportedly the company is in talks with mortgage lenders to share this knowledge so lenders can update their portfolios to take “preventative action and reduce the costly impact of strategic defaults”.
Results from FICO’s research shows strategic defaulters are characterized as those with:
- A higher end FICO score or with good previous credit history
- Better credit management and less overlimit amounts on credit
- Low balances on credit
- More credit opened within the past six months
- A short length of time in a property
All in all, these strategic defaulters would show on paper as a “sure thing” to be able to make their payments, however, many in this situation when finding out their property is worth less than the mortgage may choose to default on payments. Those that fall into this category have been described as those with a “different type of credit behavior” – a good credit behavior in many eyes, but a growing risk for mortgage companies.
In 2009 strategic defaults were at 26% and in September of 2010 the University of Chicago Booth School of Business show an increase up to 35%. The economic crisis has been suggested as the main catalyst behind this “new type of consumer credit behavior”.
The senior research director of TowerGroup, Craig Facardi was quoted, “Preventing strategic defaults — a relatively new problem — is a critical area of focus for mortgage lenders. Lenders and servicers need to evaluate and implement new analytic innovations to deal with new and traditional forms of risk.” – Source
“Strategic defaults are bad for lenders and investors, they’re bad for the homeowners who elect to default and they’re bad for neighborhoods and cities. Preventing them is in the interests of everyone involved.” – Dr. Andrew Jennings, chief analytics officer at FICO – Source
By determining those at risk of strategically defaulting servicers can reach out with information sooner to help their long term financial well-being and hopefully intervene earlier. Servicers want to make it clear to homeowners at risk that there are other options aside from foreclosure and discuss negative ramifications on credit scores. Also, this distinction will allow servicers to “avoid investing time in mortgage remediation for customers who may have no desire to retain their homes”. – Source
Servicers need to treat customers are individuals and this new development helps to hopefully tailor advice and help to those that may need it but not show it on paper.
New FICO research shows it’s possible to identify those with high risk of strategic default, not only among delinquent accounts, but also those who have not yet fallen behind on their mortgage payments. With early warning, servicers can act sooner to help consumers avoid making a decision that will negatively impact their credit standing. – Source
As shown below in the FICO research report, those more likely to strategically default increase as FICO Scores rise. The majority of defaulters having higher than a 620.
FICO reportedly found that “the riskiest 20 percent of borrowers included 67 percent of those who later committed strategic default. In other words, a servicer could reach two-thirds of those who would commit strategic default by targeting just 20 percent of its borrowers.” – Source
Those who default strategically not only hurt themselves with a reported 150+ point deduction to their credit score but also depress housing prices for neighbors and communities for those who result in foreclosure. This can create a “downward economic spiral” whilst lowering confidence in consumers.Just Thinking About Strategically Defaulting on Your Mortgage? FICO Says They Know Who You Are by Amanda Miller