Strategic defaulters


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"Homeowners who 'strategically default' on loans a growing problem"
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Among researchers' findings are these eye-openers:
* The number of strategic defaults is far beyond most industry estimates --
588,000 nationwide during 2008, more than double the total in 2007. They
represented 18% of all serious delinquencies that extended for more than 60 days
in last year's fourth quarter.
*
Strategic defaulters often go straight from perfect payment histories to no
mortgage payments at all. This is in stark contrast with most financially
distressed borrowers, who try to keep paying on their mortgage even after
they've fallen behind on other accounts.
* Strategic defaults are heavily concentrated in negative-equity markets where
home values zoomed during the boom and have cratered since 2006. In California
last year, the number of strategic defaults was 68 times higher than it was in
2005. In Florida it was 46 times higher. In most other parts of the country,
defaults were about nine times higher in 2008 than in 2005.
*
Two-thirds of strategic defaulters have only one mortgage -- the one they're
walking away from on their primary homes. Individuals who have mortgages on
multiple houses also have a higher likelihood of strategic default, but
researchers believe that many of these walkaways are from investment properties
or second homes.
* Homeowners with large mortgage balances generally are more likely to pull the
plug than those with lower balances. Similarly, people with credit ratings in
the two highest categories measured by VantageScore -- a joint scoring venture
created by Experian and the two other national credit bureaus, Equifax and
TransUnion -- are far more likely to default strategically than people in lower
score categories.
*
People who default strategically and lose their houses appear to understand
the consequences of what they're doing. Piyush Tantia, an Oliver Wyman partner
and a principal researcher on the study, said strategic defaulters "are clearly
sophisticated," based on the patterns of selective payments observable in their
credit files. For example, they tend not to default on home equity lines of
credit until after they bail out on their main mortgages, sometimes to draw down
more cash on the equity line.
Strategic defaulters may know that their credit scores will be severely
depressed by their mortgage abandonment, Tantia said, but they appear to look at
it as a business decision: "Well, I'm $200,000 in the hole on my house, and yes,
I'll damage my credit," he said of defaulters. But they see it as the most
practical solution under the circumstances.
The Experian-Wyman study does not try to explore the ethical or legal aspects of
mortgage walkaways. But it does suggest that lenders and loan servicers take
steps to screen and identify strategic defaulters in advance and possibly avoid
offering them loan modifications, since they'll probably just re-default on them
anyway.
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Cliff
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