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Daily Real Estate News  |  April 22, 2011  |   More Borrowers Have 'Strategy' to Defaulting
More borrowers who can afford their mortgage payments are opting to stop making payments and walk away from their homes. But new research sets out to help lenders pinpoint the behavior that makes up these strategic defaulters.

According to research by FICO, these strategic defaulters pay their bills on time, rarely exceed their credit card limits, hardly use retail credit cards, have a reputable credit score, and tend to have a short occupancy in their current home.

"These are savvy people who organize themselves," says Andrew Jennings, FICO's chief analytics officer. "This is a planned activity, not an impulse activity.

Since they know their credit scores will be badly hit after they default, they even tend to open up new credit cards in advance to prepare, according to the FICO study.

"Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal," Jennings says. Most borrowers who strategically default owe much more on their home than it is currently worth.

But "before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them," Jennings says.

That’s why FICO is releasing a new technology tool that will help lenders predict the probability of strategic default based on a borrower’s credit score.

"Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future," Jennings says.

How Many Are Out There?

Just how many home owners are “strategically” defaulting on their mortgage is difficult to estimate since "strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay," according to researchers from the European University Institute, Northwestern University, and the University of Chicago. Yet, researchers have estimated about 35 percent of the defaults in September may have been strategic, up from 26 percent in March 2009.

As defaulters continue to weigh on the industry, housing experts say the real estate market will take even longer to recover since foreclosures drag home prices down.

Source: “‘Strategic Defaulters’ Pay Bills on Time and Plan Ahead, Study Finds,” The Washington Post (April 22, 2011) and “New FICO Technology Predicts Strategic Default,” HousingWire (April 20, 2011)

Read more:
More Nevada Owners 'Strategically Default'

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