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At the same time, there are a growing number of “strategic defaulters” or “walkaways” who, it could be argued, garner less sympathy. Approximately 35% of mortgage defaults were strategic defaulters in September 2010, according to the University of Chicago Booth School of Business—up from 26% in March 2009. These are people who stop making payments on their mortgage despite having the financial ability to make the payments. This is particularly associated with the situation where the loan amount is considerably higher than the value of the property. The property has negative equity or is “underwater”—and in many cases is expected to remain so for the foreseeable future.
[Consumer resource: Take the Debt Diet Challenge with Jean Chatzky and Credit.com]
For example, the median home price in Merced, California, was $116,000 in the first quarter of 2011—down 68% from its peak in 2006, according to a recent USA Today article. Three of five homeowners with a mortgage in Merced owe more on their loans than their houses are worth, compared with about one in five nationally. Some of these people will likely make the “strategic” decision to walk away from the property even though they have the ability to make the payment. They are willing to accept how this decision will affect their credit score (up to a 150-point drop in a FICO score), which will make it difficult for them to get affordable credit in the near future.
Take heed, new analytics are being developed and tested that help lenders identify likely strategic defaulters before they hand over the keys to the house.
FICO has just announced the development of a new analytic solution lenders can use to identify mortgage loan holders who are most likely to walk away from the loan. If mortgage servicers adopt the solution, they can more accurately identify the potential strategic defaulter before he/she walks away, and intervene to educate them on the negative ramifications of walking away, as well as pointing them to alternative solutions to modify their loans.
[Article: Strategic Default and the Morality of Walking Away]
FICO research found that the credit profile of the strategic defaulter differs from how general defaulters have managed their credit prior to defaulting. They tend to have:
The growing trend of consumers walking away from their mortgage obligation has several negative impacts:
Strategic defaults have negative impacts for servicers, investors, borrowers and the community as a whole. Hopefully these new predictive analytics will help servicers identify potential strategic defaulters before it is too late to take alternative actions that can have a more positive outcome for everyone.
[Article: 8 Tips to Make Your Mortgage Process Easier]
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December 13, 2023
Mortgages