Study: Underwater owners who walk are more credit savvy

Associated Press

People who default on mortgages they can afford to pay are savvy about credit and tend to have better credit histories than other defaulters, new research shows.

FICO, the firm that created the widely used FICO credit score, studied credit bureau data to develop what it says is a more accurate portrait of strategic defaulters. FICO defines them as people who are underwater on their mortgage -- owing more than their home is worth -- and more than 90 days delinquent on payments but current on other credit lines.

Compared with other mortgage defaulters, strategic defaulters generally:

-Have higher credit scores. The majority of them have credit scores above 620, FICO's research shows. FICO scores go up to 850.

-Use credit more judiciously. More than 35% of non-strategic defaulters max out their credit cards vs. less than 10% of strategic defaulters.

-Have not been in their home very long.

-Shop for new credit card lines before they strategically default.

"They're getting their life in order," says Andrew Jennings, chief analytics officer at FICO.

Lenders have traditionally used the degree of home price depreciation as a basis for predicting strategic defaults. But FICO's research gives a more complete picture, Jennings says. The company last week announced new tools that it says will help lenders better identify strategic defaulters before they default.

Other companies, including CoreLogic, have launched similar products as the strategic defaults continue to erode home values.

While the exact number of strategic defaults can't be determined, studies indicate they account for many lost homes. The University of Chicago Booth School of Business estimates that strategic defaults accounted for 35% of defaults in September vs. 26% in March 2009. In January, the Nevada Association of Realtors released a study showing that 23% of Nevadans who lost homes admitted to strategically defaulting.

Nationwide, 23% of homeowners with a mortgage are underwater, CoreLogic says. That means the problem of strategic defaults is likely to persist, says Craig Focardi, a TowerGroup banking consultant.

Strategic defaulters can be hard to identify because they typically make their house payments, and pay other bills, until they begin the strategic default process, Focardi says.

By identifying at-risk borrowers sooner, lenders may be able to guide them to options other than strategic default, say Frank Pallotta of Loan Value Group. His company aims to reduce strategic defaults by getting lenders to reward borrowers who pay off their loans.

by Julie Schmit USA TODAY Apr. 25, 2011 08:14 AM



Study: Underwater owners who walk are more credit savvy