A just-released study aims to get inside the minds of underwater homeowners and predict who is most likely to default on purpose. Certain owners, the study found, are 110 times more likely to strategically default—i.e., stop paying the mortgage even if they have the money to keep paying. This sort of data has got to be pretty interesting to mortgage lenders.
The study, from credit-scoring system FICO, lists several homeowner characteristics that indicate a higher likelihood of walking away, including a shorter length of residency (so there’s less emotional attachment). Interestingly enough, however, what homeowners likely to strategically default have in common is that they’re generally pretty smart and responsible with their money. The homeowners who have good credit scores, pay their bills on time, and have rarely gone over their credit limits are the ones FICO says are most apt to default purposefully.
A FICO officer explained to the Washington Post:
“These are savvy people who organize themselves,” said Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.”
And apparently, the number of such savvy people is growing: It’s estimated that last September, 35% of mortgage defaults were strategic, up from 26% in March 2009.
How does FICO expect all of this data to be used? Well, if lenders can predict which homeowners are most likely to strategically default, they can target these homeowners are take steps that would stop them from walking away. The FICO release states:
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.
What, exactly, is meant by “targeting”? It could mean all sorts of things. But pretty much it means the lender would approach a homeowner and negotiate some way to minimize losses, if not figure out a means the mortgage to somehow keep getting paid. An Atlantic post imagines one such scenario:
For example, let’s say your home is worth $100,000 less than your mortgage balance. You know that walking away will ding your otherwise relatively strong credit record, but you determine it probably won’t do $100,000 in damage. It makes sense for you to walk away. That is, unless the bank gets to you first to convince you otherwise. Perhaps it encourage you to do a short sale before you ever go delinquent on your mortgage. The bank will likely incur a smaller loss due to foreclosure-related costs it escapes. The borrower’s credit score will be better off as well.
Everybody wins. Or maybe everyone loses less.