Strategic default refers to a relatively new phenomenon where borrowers who have the capacity to make their mortgage payments but choose instead to default, often because the property value is less than what they owe on the mortgage loan.
Last year, the practice had become such a concern within the industry that Fannie Mae announced policy changes aimed at stepping up penalties against borrowers who simply walked away from their mortgage obligations even though they had the ability to continue payments. But the problem is, how do you pinpoint a strategic defaulter?
The credit assessment firm FICO says it’s developed a method, using consumer behavior analytics, that will allow lenders to identify borrowers who are a risk for strategic default.
FICO Labs research indicates that borrowers whose homes have lost the most value are only twice as likely to default as those whose homes have lost the least value.
All factors point to the fact that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments.
Among current borrowers, 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.
FICO is already consulting with top mortgage lenders to provide custom analytic solutions for their mortgage portfolios, in order to take preventative action and reduce the costly impact of strategic defaults.