So-called strategic defaulters who voluntarily stop making their mortgage payments are very savvy financially and sometimes line up their next home and loan before they walk, according to a new study.
"They are high income, they are high wealth, they own multiple homes, they have higher … (credit) scores and they are very financially savvy," said Tracy Bremmer, director of product marketing and management at Experian, the credit reporting agency that issued the study. Reuters obtained a copy in advance of its distribution.
Credit reporting agencies and scoring companies are trying to identify borrowers who strategically stop making affordable payments so mortgage bankers can be strategic in return.
"Lenders are still interested in educating people about whether they really understand the repercussions," said Andrew Jennings of FICO. For example, he pointed out that some 38 states allow lenders to go after foreclosed borrowers for the extra money that was promised in the mortgage but not collected during the foreclosure sale.
His firm recently launched a new scoring algorithm he said could point lenders to borrowers who are likely to strategically default even before they start skipping payments.
An earlier study by FICO found that strategic defaulters had relatively strong median FICO scores of 663 and low credit card balances. But they had other items in common: They may have applied for other credit recently, are underwater in their mortgages (owing more than the home is worth) and are heavily concentrated in areas where the pace of home values falling below mortgage balances is accelerating.
Vantage, the other major credit scoring company, has focused thus far on alerting lenders to which already-delinquent borrowers probably fit the "strategic" category. "Lenders may not want to waste their time trying to do mortgage modifications" with that group, suggested Bremmer.
The study found that roughly 3 percent of strategic defaulters (who in turn make up about 17 percent of all defaults) went out and obtained new mortgages just before they stopped making payments. "That strategy is certainly in place," said an Experian representative. "Strategic defaulters carefully plan ahead of time before defaulting in order to purchase another home prior to leaving their current home."
At that point, their credit scores and earnings histories might easily qualify them for the new loans. Once they settled on the new home and stopped making payments on their old home, they would not have to worry so much about the resulting credit score hit (about 140 points off of an 862 Vantage score for a foreclosure).
There may not be as many "strategic defaulters" as presumed. Experian found that 17 percent of mortgage defaults were by people who could afford to keep up the payments. But new research still under way at FICO indicates that by 18 months after foreclosure, the majority of those people were having other financial problems.
