FICO Seeks to Help Lenders Prevent Strategic Default

In a news release on April 21, FICO announced a new analytic advance. This one will help lenders identify those borrowers who are most likely to choose strategic default over continuing to make payments on their homes. Note that these are borrowers who have the ability to make the payments, but choose to walk away instead.

Apparently, the plan is for lenders to seek out these homeowners with an offer of loan modifications – even though they haven’t requested it.

Why are they so concerned? Because the number of strategic defaults is rising. According to studies from the University of Chicago, by last September 35% of all loan defaults were strategic. This contrasts to 26% just 18 months earlier.

Add to this a study by CoreLogic stating that 11.1 million residential mortgages in the U.S. (23.1%) have negative equity, and lenders are looking at a huge pool of homeowners who just might strategically default.

35% of 11.1 million is 3,885,000 homeowners who can pay, but may choose to walk away.

So in addition to having negative equity, what are the indicators that a homeowner may choose strategic default? They’re hard to believe…
•    High credit scores
•    Low revolving credit balances
•    Few instances of exceeding credit card limits
•    Low retail credit card usage

In other words, people who appear to be the perfect borrowers.

Unfortunately, those who choose strategic default could be in for a rude awakening. They believe that the only consequences will be to their credit scores, but that may not be the truth.

Lenders in most states can sue the homeowner for what is known as a “deficiency.” This is defined as the difference between the balance owed at the time of default and the amount realized by the bank when the house is re-sold. Of course, all the costs of foreclosure, maintenance, and selling are deducted from the sale price before the figure is computed.

Thus, strategic default can saddle a homeowner with a huge debt. So think it over carefully and consult with your attorney and financial advisor before making this move.

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