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Can We Predict Mortgage Loan Walk-Aways?

It’s generally estimated that about a third of all mortgage foreclosures are simply voluntary, people who can afford their monthly payments but throw in the financial towel and make a strategic decision to walk away from their homes and loans. Now a new system says it can predict who will walk and who will stay.

FICO Labs, part of Fair Isaac, the company closely associated with development of the credit score concept, says it has created a mathematical model which has “the ability to identify borrowers who are over 100 times more likely to default strategically than others.”

“FICO Labs researchers,” says the company, “have found that, as a group, strategic defaulters tend to be more savvy managers of their credit than the general population, with higher FICO Scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This indicates that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments.”

Forgive me, but does this not also sound like the decisions of someone with sane financial practices? And don’t people who handle credit well, by definition, handle credit differently than distressed borrowers, people who have lost their jobs, gotten divorced, had an auto accident or faced a health emergency?

Among current borrowers — those not delinquent on any loans — FICO says:

  • “The riskiest borrowers were found to be 110 times more likely to commit a strategic default than the least risky borrowers.
  • “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.”

According to TransUnion, “the percentage of consumers current on their credit card payments and delinquent on their mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008 (Q1 2008). Although many industry analysts believed that a reversion to the conventional payment hierarchy would ensue once the recession had concluded, this has not been the case.”

“The reversal of the traditional payment hierarchy was driven in large part by home value depreciation and rising unemployment, both of which speak to consumer willingness and ability to pay their mortgages versus their credit cards. Home value concerns and stubbornly high unemployment continue to drive this dynamic, though the decline in the number of consumers delinquent on mortgages and current on credit cards may be a sign that the divergence in the payment hierarchy has peaked,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit.


Consequences

None of this amazing.

Think of the consequences associated with various types of non-payment.

  1. You don’t make an auto payment and in the middle of the night a large person from the finance company hot-wires your car and you can’t get to work the next day.
  2. You don’t make a credit card payment and your credit is cut off. Suddenly you can’t get food.
  3. You don’t make your mortgage payment, and, well, in many cases nothing happens for months.

Hawaii

To understand why imagine that you live in Hawaii. You don’t pay your mortgage for three months. The lender files to foreclose. Do you instantly lose your home? Not hardly. According to RealtyTrac the typical Hawaiian foreclosure takes 11 months. That’s 14 months of mortgage-free living.

Soon however, Hawaii foreclosures will take longer. Why? The state House has approved HB 894, a bill that would extend the foreclosure process by five months — and the vote was 50 to 1.

The argument here is NOT that anyone should purposely or willfully default on their mortgage, rather it’s the observation that one should hardly be surprised that a growing number of homeowners are changing their financial attitudes. You just don’t need a mathematical model to see that.

Consumers with bad credit have a tough time getting loans and now, perhaps, people with good credit will also have a tough time because a large number of walk-away homeowners also have good credit. This is like saying we should be suspicious of people who drink milk because — statistically — as children a majority of bank robbers drank the stuff.

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Posted in: Mortgages

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