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FICO Analysis: Strategic Default Problem Grows

A recent FICO data analysis found more than six million U.S. homeowners have a current-loan-to-value ratio of 120 or higher, meaning they are at least 20 percent underwater on their mortgages. Based on recent data from Fannie Mae, these homeowners are more than twice as likely as other borrowers to consider defaulting on their mortgage.

These figures suggest that an already-depressed housing industry may be more susceptible to more incidents of strategic default. Studies from the University of Chicago Booth School of Business indicate that 35 percent of mortgage defaults in September 2010 were strategic, up from 26 percent in March 2009. And FICO’s latest quarterly survey of U.S. risk managers found that 49 percent of respondents do not expect housing prices to rebound before the year 2020.

Clearly, borrowers are increasingly likely to see strategic default as a realistic or necessary option for them. But such decisions are devastating to their credit profiles – a strategic default could cause one’s FICO® Scores to drop as much as 140 to 160 points. Also, strategic defaults have a tremendous effect on lender portfolios and the housing industry, further weighing down an economy already struggling to recover.

Analytics now exist that can help lenders get ahead of this growing trend. We published research in April that shows how analytics can identify borrowers 110 times more likely to commit a strategic default than the least risky borrowers. The research also showed that a mortgage servicer could reach two-thirds of those high-risk borrowers by focusing on just 20 percent of its borrower portfolio.

You can learn more about our strategic default research by reading the Insights white paper: “Predicting Strategic Default” (Vol. #50).

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