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Just Thinking About Strategically Defaulting on Your Mortgage? FICO Says They Know Who You Are

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.

FICO’s Predicting Strategic Default Research Report
FICO Press Release

Just Thinking About Strategically Defaulting on Your Mortgage? FICO Says They Know Who You Are by

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About Amanda Miller

Amanda Miller
  • Andy Faria

    I could go on and on about this subject myself. The more I think about it, the more it bothers me. If the banks are Mr Burns, than FICO is Smithers.

    What is insulting is when the chief of analytics for FICO pretends like he’s out to help the little guy and says, ““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.”

    - Dear Dr Jennings, some questions. So for Joe the Plumber that is $100k underwater on his home and he can barely afford his mortgage payments now, those 200-300 points he may lose on his FICO score, are worth who knows how long worth of financial suffering? So he should just piss money away for the next couple years floating a loser investment until he is totally bankrupt? How does a short sale 2 years from now, instead of now help the neigborhood? …… because that’s what you’re telling people.-

    I’m not buying that FICO is out to help anybody but the banks, so they should stop pretending to care. If they really wanted to help they would be spending their time analyzing how to create some kind of “amnesty calculation” for borrowers that have fallen victim to either predatory lending, subprime, or even common victims of the housing market (underwater). I’m not saying they should just ignore the past 3 years of someone’s credit history, but they must be able to make some kind of change to the formula, so that normally credit-worthy people can gain access to credit again sooner.

  • Steve Rhode

    I read it the same way. Lenders are already not doing enough to help underwater homeowners so what will an advance notice provide them? I think you hit the nail on the head, penalties.

  • Amanda_Miller

    Steve and I spent a long while discussing this new development last night. It truly seems like whether you’ve got good or bad credit you’re a risk.

    This entire scenario bothers me too, based on the outline of people they are targeting as possible strategic default risks are those that appear to have worked hard to get good credit and recently purchased a house.

    “Congratulations on your first home Mr. and Mrs. Smith. You have excellent credit and are ready to start your life in your new home. We are thrilled for you. Oh, and we’ll be watching you… Sincerely, Your Mortgage Lender”

  • Anonymous

    Steve and I spent a long while discussing this new development last night. It truly seems like whether you’ve got good or bad credit you’re a risk.

    This entire scenario bothers me too, based on the outline of people they are targeting as possible strategic default risks are those that appear to have worked hard to get good credit and recently purchased a house.

    “Congratulations on your first home Mr. and Mrs. Smith. You have excellent credit and are ready to start your life in your new home. We are thrilled for you. Oh, and we’ll be watching you… Sincerely, Your Mortgage Lender”

    • http://northeast-properties.com Andy Faria

      I could go on and on about this subject myself. The more I think about it, the more it bothers me. If the banks are Mr Burns, than FICO is Smithers.

      What is insulting is when the chief of analytics for FICO pretends like he’s out to help the little guy and says, ““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.”

      - Dear Dr Jennings, some questions. So for Joe the Plumber that is $100k underwater on his home and he can barely afford his mortgage payments now, those 200-300 points he may lose on his FICO score, are worth who knows how long worth of financial suffering? So he should just piss money away for the next couple years floating a loser investment until he is totally bankrupt? How does a short sale 2 years from now, instead of now help the neigborhood? …… because that’s what you’re telling people.-

      I’m not buying that FICO is out to help anybody but the banks, so they should stop pretending to care. If they really wanted to help they would be spending their time analyzing how to create some kind of “amnesty calculation” for borrowers that have fallen victim to either predatory lending, subprime, or even common victims of the housing market (underwater). I’m not saying they should just ignore the past 3 years of someone’s credit history, but they must be able to make some kind of change to the formula, so that normally credit-worthy people can gain access to credit again sooner.

  • Andy Faria

    This article totally rubs me the wrong way. The strategic default concept has been born out of the lenders refusal to offer modifications or short sales to borrowers that remain current, nothing else. The quote, “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”, is a steaming pile of bs. It’s simply not true, unless a borrower is behind, the lenders have nothing to offer them.

    I wonder, what will the lenders do with the information they gather from FICO? Will they create a program where they reach out to those homeowners ahead of them defaulting, to offer a modification? I highly doubt it, they will most likely take steps to increase the penalties and secure their own bottom line.

    In my opinion a home that is underwater by a large amount is worse for local home prices than a short sale or foreclosure. At least with a short sale or FC sale the home’s value will be corrected, and now has a borrower that has some equity. That borrower can sell or refinance that property if they need to, whereas if the underwater borrower remains in the home struggling, they may spend the next 10 yrs stuck with a home that has no transferrability whatsoever. Sure short sales and FC’s will pull down home values over the short term, but they improve the long term health of local home values.

  • http://northeast-properties.com Andy Faria

    This article totally rubs me the wrong way. The strategic default concept has been born out of the lenders refusal to offer modifications or short sales to borrowers that remain current, nothing else. The quote, “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”, is a steaming pile of bs. It’s simply not true, unless a borrower is behind, the lenders have nothing to offer them.

    I wonder, what will the lenders do with the information they gather from FICO? Will they create a program where they reach out to those homeowners ahead of them defaulting, to offer a modification? I highly doubt it, they will most likely take steps to increase the penalties and secure their own bottom line.

    In my opinion a home that is underwater by a large amount is worse for local home prices than a short sale or foreclosure. At least with a short sale or FC sale the home’s value will be corrected, and now has a borrower that has some equity. That borrower can sell or refinance that property if they need to, whereas if the underwater borrower remains in the home struggling, they may spend the next 10 yrs stuck with a home that has no transferrability whatsoever. Sure short sales and FC’s will pull down home values over the short term, but they improve the long term health of local home values.

    • http://GetOutOfDebt.org Steve Rhode

      I read it the same way. Lenders are already not doing enough to help underwater homeowners so what will an advance notice provide them? I think you hit the nail on the head, penalties.

  • Steve Rhode

    It’s almost the ultimate irony that the better your credit, the higher you are on the risk-o-meter. It is apparently not safe anywhere on the FICO scale.

  • Angelo

    Im wondering if providing this data to banks will result in lowering of available credit, increase in interest rates as they are now considered higher risk? This action can be the trigger that ultimately forces a bankruptcy. Just something to think about…

  • Angelo

    Im wondering if providing this data to banks will result in lowering of available credit, increase in interest rates as they are now considered higher risk? This action can be the trigger that ultimately forces a bankruptcy. Just something to think about…

    • http://GetOutOfDebt.org Steve Rhode

      It’s almost the ultimate irony that the better your credit, the higher you are on the risk-o-meter. It is apparently not safe anywhere on the FICO scale.

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