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Predicting strategic defaults

By Polyana da Costa · Bankrate.com
Thursday, April 21, 2011
Posted: 3 pm ET

Owning a home that is worth less than what you owe on your mortgage isn't fun.

But if the thought of walking away from this mortgage has ever crossed your mind, you might want to know that someone may be watching you.

FICO announced it has developed new technology to predict which borrowers are more likely to become strategic defaulters -- borrowers who can afford to make their mortgage payments but choose not to make them.

"We've uncovered the types of behavior that are indicative of someone who is going to be a strategic defaulter," said Andrew Jennings, chief analytics officer at FICO.

FICO claims it can identify the riskiest borrowers, who are 110 times more likely to strategically default on their mortgage loans than the average homeowner.

For example, strategic defaulters have lower revolving balances, meaning they are not as indebted as somebody who misses mortgage payments because they can't afford it, Jennings said. They also tend to have higher credit scores and have lived in the property for shorter periods, which often means they are money savvy and not as attached to their homes. Strategic defaulters also tend take out a number of credit obligations such as a car loan shortly before they default because they know their credit will be dented after they stop paying their mortgages.

"Strategic default doesn't happen by accident," Jennings said. "They organize themselves in order to become a strategic defaulter."

A FICO study conducted in 2008-2009 analyzed the credit situation of consumers who were underwater, 90 days or more delinquent on their mortgage loans, but current on other debt such as credit cards and car loans. The majority of those in default had credit scores above 620, the study found.

No, this doesn't mean that if you have a good credit score, low balance on your credit cards and are upside-down on your mortgage, your lender will knock on your door to ask if you are planning on defaulting. But they'll probably be watching your credit moves.

Lenders have "expressed great interest" for the service FICO is offering, Jennings said.

The tool allows them to "educate" consumers about the consequences a default would have on their credit and in the event of default it allows the lenders to better understand the type of borrower they are dealing with when trying to collect those missed payments, he said.

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