Who walks away from their home?
Research sheds light on the sophisticated calculations and planning by those who strategically default on mortgages.
This post comes from Marilyn Lewis at MSN Money.
In these strange and stressful times, a group of financially sophisticated homeowners has arisen who're using foreclosure as a means of exiting bad real estate investments.
Unlike financially distressed homeowners who struggle to pay the mortgage until they're overwhelmed by debt, strategic defaulters can make their home payments but decide they're better off bailing, usually when the home's value drops below the mortgage amount.
A recent research paper by FICO -- "Predicting Strategic Default" -- sheds new light on this group.
"These are savvy people who organize themselves," said Andrew Jennings, FICO's chief analytics officer. "This is a planned activity, not an impulse activity."
Anticipating that their credit is about to be destroyed, these homeowners tend to open new credit cards before defaulting. They keep up with all their other debts after defaulting on the mortgage. They rarely exceed credit card limits and don't much use retail credit cards.
The Post says that homeowners more likely to strategically default:
- Are angry about their financial situations.
- Mistrust banks and want them to be better regulated.
- Know someone who defaulted strategically.
- Have new mortgages with relatively large balances.
- Have higher credit scores, typically FICO scores above 620 (of a possible 850).
On the other hand, people are less willing if they think strategic default is immoral, research has shown.
USA Today adds that strategic defaulters are savvy about using credit: "More than 35% of non-strategic defaulters max out their credit cards vs. less than 10% of strategic defaulters":
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.
Each default -- strategic or otherwise -- hurts not only banks but all property owners, since more cheap foreclosures dumped onto the market drive down home values and hurt communities.
Keep it in perspective
But keep the numbers in perspective, Sam Khater, a senior economist at the mortgage research firm CoreLogic, told the Post.
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Only 7% of 11 million underwater American homeowners have defaulted so far. Even if -- and it's unlikely -- all those defaults were strategic, it's still a "relatively small number," Khater points out.
"Strategic default starts to make sense for borrowers who are extremely underwater on their loans with little prospect for price recovery," Khater says. With home prices nearing a bottom, the impetus for strategically defaulting is fading.
FICO is the company whose credit-scoring tools are used by lenders to decide whether to grant you credit (or a job or apartment). FICO says its "predictive analysis" tools let users predict fraud and "customize consumer offers with pinpoint accuracy."
Lately, its researchers have focused on identifying the hallmarks of borrowers most likely to walk away from a mortgage. Its recent report is part of a push to market products that FICO says help lenders spot strategic defaulters before they bail. Other companies -- CoreLogic is one -- has similar tools.
FICO reports that borrowers whose homes lost the most value are only twice as likely to default as those who lost the least value. Through its custom analytics, FICO is able to identify the riskiest borrowers, who are 110 times more likely to default than the average homeowner.
The riskiest 20% of borrowers in FICO research included 67% of those who later committed strategic default, the research firm said.
But only USA Today addresses -- and just in passing -- how lenders and mortgage servicers might use this information:
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.
An online industry
The FICO report does not touch on the online world of tips, tactics, businesses and community that has sprung up for strategic defaulters.
There's a mix of fact, opinion and speculation, some verifiable, some not. You'd want to think carefully before basing any legal or financial decisions on it. And remember that any "advice" you find may be guiding you to products and services for sale.
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"Hi, it's Christine again. I want to talk with you about how to plan for strategic default," YouTuber ChristineESpringer tells viewers.
Her profile identifies her as a paralegal and founder of Desert Edge Legal Services LLC, a legal services company based in Scottsdale, Ariz., that specializes in foreclosures.
Springer shares tips like: Withdraw your money from the bank holding your mortgages before you default. Your bank "can and they will empty your bank account" to collect on outstanding debts.
At another site, StrategicDefault.com, readers post stories and comments. A related site, YouWalkAway.com, uses a live chat agent and offers a strategic default calculator that lets users run their numbers. The owner, a San Diego foreclosure agency, guides homeowners through the foreclosure process for a fee.
"We walked away and after 1 year my wife's score is 775!" exults one entry. "Thank you for your support, YouWalkAway.com, your fee was money well spent!"
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