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(snip)"A new study sheds additional light on the issue of "strategic defaults" in America, offering further insights into homeowners who are statistically more likely to make a calculated decision to stop paying their mortgages.

Currently, about 25% of homeowners nationwide are underwater – meaning they owe more on their homes than the properties are worth. A strategic default occurs when a homeowner decides to stop paying his or her mortgage, even while that individual generally keeps up with other payments, such as credit card bills or an auto loan.

This latest study on strategic defaults comes from Fair Isaac Corp., creator of the FICO credit score. It adds to a growing body of research that aims to help banks and other lenders predict which consumers are most likely to walk away from homes that are underwater.

According to Fair Isaac's study, called Predicting Strategic Default, some key characteristics of strategic defaulters include:

• Better FICO Scores
FICO credit scores range from 300 to 850 points. Fair Isaac's research shows that nearly all strategic defaulters previously had a "good" credit rating and a score of 620 or higher. Many strategic defaulters even have scores in the high 700s or 800s.

• Less credit card debt and lower retail balances
Surprisingly, those who strategically default on a mortgage tend to manage their credit card debt well, spending money carefully and generally keeping their credit card and retail balances lower than that of the general population.

• Shorter length of residence in the property
Because strategic defaulters typically haven't lived in their homes for very long periods of time, Fair Isaac officials suggest this translates into less emotional "attachment" to a home.

• More recently opened credit in the past six months
Strategic defaulters are more likely to have opened credit card accounts in recent months, perhaps, according to Fair Isaac, as a way to prepare for life after a strategic default – when credit will become much harder to obtain.

Fair Isaac's research into strategic defaulters follows other recent studies on the topic, including data from VantageScore Solutions LLC, developer of the VantageScore. The VantageScore is a credit score that was developed by the three credit bureaus, Equifax, Experian and TransUnion. VantageScores range from 501 to 990 points.

During a recent webinar on the topic of improving risk prediction, VantageScore Solutions Senior Vice President Analytics, Product Management & Research, Sarah Davies, highlighted what lenders and credit risk managers should be focused on when trying to spot people who are more likely to be strategic defaulters.

"We're all aware of a great deterioration in credit quality. Default levels are increasing across the board in all industries, but what we're also seeing are shifts in the way consumers are thinking about their debts," said Davies. "Historically, we've known that mortgage payments were the most important payment for the average consumer, but with the recent phenomenon of strategic defaults, we're seeing people prioritize their debts in different ways."

For instance, consumers with at least one late payment on their credit reports are increasingly choosing to pay their credit card debts and auto loans before their mortgage, she said.

But defaulting on a mortgage, whether by choice or by economic circumstance, obviously has several negative ramifications. The two biggest penalties for consumers: taking a hit to your credit rating and being locked out of a big segment of the mortgage market for several years.

"Making the decision to willfully default on a mortgage is not only ethically questionable but it will take its toll on a credit score," says VantageScore Solutions CEO Barrett Burns. "If a consumer with a starting VantageScore of 862, which is considered 'prime plus,' can lose up to 140 points from a foreclosure, someone with a slightly higher score should be prepared for a major reduction."

In studying strategic defaults, VantageScore has found that:

• Individuals with ultra-high credit scores – those consumers boasting so-called "super prime" VantageScores of 901 to 990 points – became strategic defaulters at a rate 50% higher than the overall delinquent population.

• Borrowers with multiple first mortgages (i.e., real estate investors) had higher levels of strategic default.

• Consumers with bigger mortgage balances were also more likely to be strategic defaulters. This was true even when researchers controlled for variables like geography, number of first mortgages and the borrower's VantageScore

Despite Penalties, Strategic Defaults Gain In Popularity

Beyond the toll on a person's credit, there's also the prospect that a strategic default will make it much tougher to jump back into home ownership. In 2010, Fannie Mae announced that strategic defaulters would be banned from getting Fannie Mae home loans for seven years from the date of the foreclosure.

Despite the threat of a damaged credit rating and diminished access to home loans in the future, it's clear that defaulting on a mortgage is nonetheless gaining ground with consumers as a viable option for dealing with their financial predicaments.

In a December 2010 survey published by RealtyTrac, nearly half of all homeowners polled (48%) said they would consider walking away if their mortgage was underwater. That 48% figure shot up from 41% in May 2010, suggesting that a growing number of Americans think it would be acceptable, at least under certain circumstances, to abandon their mortgages."(snip)


Arguably this is an outgrowth of the following ...

A. strategic defaulters stand to 'save' $100,000 by defaulting on an existing mortgage whose balance is $100,000 higher than the current market value of their property

B. strategic defaulters stand to live 'rent free' for at least a year ... more likely 2+ years ... and perhaps forever ... as legal problems with mortgage title registrations on recently originated mortgages complicate the foreclosure process. Depending on local rent rates, this can represent an additional 'savings' of $1500-$2500 a MONTH = a potential $50k worth of 'rent' payments that won't need to be made until the point finally arrives where they are actually foreclosed / evicted.

C. limited access to future mortgage funding as a result of a strategic default may not actually worsen the availability of future mortgage funding for certain borrowers ( self-employed, incomes difficult to verify, high debt to income ratio etc. )