Tag: strategic default

Despite the improving real-estate market, financial institutions are concerned about lending to consumers who have pursued strategic defaults. In a recent VantageScore Solutions survey, 85 percent of respondents believe that consumers who have pursued strategic defaults pose increased risk, even if they meet the institution’s other lending criteria. More than half of those surveyed said they are not likely to approve strategic defaulters for a mortgage loan in the next 12 months. Source: The Score: Short sales and foreclosures make lenders wary VantageScore® is a registered trademark of VantageScore Solutions, LLC.

After increasing for the first time in nearly two years, the 30 and 60 days past due (DPD) mortgage delinquencies as a percentage of balances returned to their downward trend, with Q4 delinquency rates of 2.18 percent and 1.06 percent, respectively. This represents a decline of 3.5 percent for the 30 DPD category and a 2.8 percent decline for 60 DPD. Listen to our recorded Webinar for a detailed look at the current state of mortgage strategic default and an update on consumer credit trends from the Q4 2011 Experian-Oliver Wyman Market Intelligence Reports. Source: Experian-Oliver Wyman Market Intelligence Reports.

In Q3 2011, $143 billion – or nearly 44 percent of the $327 billion in new mortgage originations – was generated by VantageScore® A tier consumers. This represents an increase of 35 percent for VantageScore A tier consumers when compared with originations for the quarter before ($106 billion, or 39 percent of total originations). Watch Experian's Webinar for a detailed look at the current state of strategic default in mortgage and an update on consumer credit trends from the Q4 2011 Experian-Oliver Wyman Market Intelligence Reports Source: Experian-Oliver Wyman Market Intelligence Reports. VantageScore® is owned by VantageScore Solutions, LLC.

With the news from the Federal Reserve that joblessness is not declining, and in fact is growing, a number of consumers are going to face newly difficult times and be further challenged to meet their credit obligations. Thinking about how this might impact the already struggling mortgage market, I’ve been considering what the impact of joblessness is on the incidence of strategic default and the resulting risk management issues for lenders. Using the definitions from our previous studies on strategic default, I think it’s quite clear that increased joblessness will definitely increase the number of ‘cash-flow managers’ and ‘distressed borrowers’, as newly jobless consumers face reduced income and struggle to pay their bills. But, will a loss of income also mean that people become more likely to strategically default? By definition, the answer is no – a strategic defaulter has the capacity to pay, but chooses not to, mostly due to their equity position in the home. But, I can’t help but consider a consumer who is 20% underwater, but making payments when employed, deciding that the same 20% that used to be acceptable to bear, is now illogical and will simply choose to stop payment? Although only a short-term fix, since they can use far less of their savings by simply ceasing to pay their mortgage, this would free up significant cash (or savings) for paying car loans, credit cards, college loans, etc; and yet, this practice would maintain the profile of a strategic defaulter. While it’s impossible to predict the true impact of joblessness, I would submit that beyond assessing credit risk, lenders need to consider that the definition of strategic default may contain a number of unique, and certainly evolving consumer risk segments. __________________________ http://money.cnn.com/2010/08/19/news/economy/initial_claims/index.htm

By: Staci Baker With the increase in consumer behaviors such as ‘strategic default’, it has become increasingly difficult during the past few years for lenders to determine who the most creditworthy consumers are – defining consumers with the lowest credit risk. If you define risk as ‘the likelihood of [a consumer] becoming 90 days or more past due’, the findings are alarming. From June 2007 to June 2009, Super Prime consumers (those scoring 900 or higher) in the U.S. have gone from an average  VantageScore® credit score* of 945 to 918, which increased their risk level  from approx. 0.12% to 0.62% - an increase of 417% for this highly sought after population!  Prime and near prime risk levels increased by 400% and 96% respectively.  Whereas subprime consumers with few choices (stay subprime or improve their score), saw a slight decrease in risk, 8% - increasing their average VantageScore® credit score from 578 to 599. So how do lenders determine who to lend to, when the risk level for all credit tiers increases, or remain risky?  In today’s dynamic economy, lenders need tools that will give them an edge, and allow them to identify consumer trends quickly.  Incorporating analytic tools, like Premier Attributes, into lender’s origination models, will allow them to pinpoint specific consumer behavior, and provide segmentation through predefined attribute sets that are industry specific and target profitable accounts to improve acquisition strategies. As risk levels change, maintaining profitability becomes more difficult due to shrinking eligible consumer pools.  By adding credit attributes, assessing credit risk both within an organization and for new accounts will be simplified and allow for more targeted prospects, thus maximizing prospecting strategies across the customer lifecycle and helping to increase profitability. * VantageScore®, LLC, May, 2010, “Finding Creditworthy Consumers in a Changing Economic Climate”  

By: Staci Baker As more people have become underwater on their mortgage, the decision to stay or not stay in their home has evolved to consider a number of influences that impact consumer credit decisions.  Research is revealing that much of an individual’s decision to meet his credit obligations is based on his trust in the economy, moral obligation, and his attitude about delinquency and the effect it will have on his credit score. Recent findings suggest that moral obligation keeps the majority of homeowners from walking away from their homes.  According to the 2009 Fannie Mae National Housing Survey (i) – “Nearly nine in ten Americans (88%), including seven in ten who are delinquent on their own mortgages, do not believe it is acceptable for people to stop making payments on an underwater mortgage, while 8% believe it is acceptable.”  It appears that there is a sense of owning up to one’s responsibilities; having signed a contract and the presumed stigma of walking away from that obligation. Maintaining strong creditworthiness by continuing to make payments on an underwater mortgage is motivation to sustain mortgage payments.  “Approximately 74% of homeowners believe it is very important to maintain good credit and this can be a factor in encouraging them not to walk away (ii).”  Once a homeowner defaults on their mortgage, their credit score can drop 150 to 250 points (iii), and the cost of credit in the future becomes much higher via increased interest rates once credit scores trend down. Although consumers expect to keep investing in the housing market (70% said buying a home continues to be one of the safest investments available (iv)) they will surely continue optimizing decisions that consider both the moral and credit implications of their decisions. i     December, 2009, Fannie Mae National Housing Survey ii  4/30/10, Financial Trust Index at 23% While Strategic Defaults Continue to Rise, The Chicago Booth/Kellogg School Financial Trust Index iii  http://www.creditcards.com/credit-card-news/mortgage-default-credit-scores-1270.php iv  December, 2009, Fannie Mae National Housing Survey    

In my previous two blogs, I introduced the definition of strategic default and compared and contrasted the population to other types of consumers with mortgage delinquency.  I also reviewed a few key characteristics that distinguish strategic defaulters as a distinct population. Although I’ve mentioned that segmenting this group is important, I would like to specifically discuss the value of segmentation as it applies to loan modification programs and the selection of candidates for modification. How should loan modification strategies be differentiated based on this population? By definition, strategic defaulters are more likely to take advantage of loan modification programs. They are committed to making the most personally-lucrative financial decisions, so the opportunity to have their loan modified - extending their ‘free’ occupancy – can be highly appealing.  Given the adverse selection issue at play with these consumers, lenders need to design loan modification programs that limit abuse and essentially screen-out strategic defaulters from the population. The objective of lenders when creating loan modification programs should be to identify consumers who show the characteristics of cash-flow managers within our study. These consumers often show similar signs of distress as the strategic defaulters, but differentiate themselves by exhibiting a willingness to pay that the strategic defaulter, by definition, does not. So, how can a lender make this identification? Although these groups share similar characteristics at times, it is recommended that lenders reconsider their loan modification decisioning algorithms, and modify their loan modification offers to screen out strategic defaulters.  In fact, they could even develop programs such as equity-sharing arrangements whereby the strategic defaulter could be persuaded to remain committed to the mortgage.  In the end, strategic defaulters will not self-identify by showing lower credit score trends, by being a bank credit risk, or having previous bankruptcy scores, so lenders must create processes to identify them among their peers. For more detailed analyses, lenders could also extend the Experian-Oliver Wyman study further, and integrate additional attributes such as current LTV, product type, etc. to expand their segment and identify strategic defaulters within their individual portfolios.    

By: Tracy Bremmer There has been a lot of hype these days about people strategically defaulting on their mortgage loans. In other words, a consumer is underwater on their house and so he/she makes a strategic decision to walk away from it. In these instances, the consumer is current on all of their non-mortgage accounts, but because the value of their home is less than what they owe, they make the decision to default on their mortgage loan. Experian and Oliver Wyman teamed up to really dig into this population and determine these issues: • Does this population really exist? • If so, what are the characteristics of this population, such as assessing credit risk or bankruptcy scores? • How should loan modification strategies be differentiated based on this population? This blog will be one of a three-part series that addresses these questions. Let’s begin with the first question. 1.  Does this population really exist? The quick answer is yes – this population does indeed exist. In fact, in 2008 strategic defaulters represented 18 percent of all mortgage defaults, up 500 percent from 2004. When we conducted our study we found there were varying populations that also existed when it came to mortgage defaults. In fact, we classified mortgage defaulters into five categories: strategic defaulter, cash flow manager, distressed defaulter, no non-real estate trades, and pay-downs. We defined these populations as follows: • Strategic defaulter - Borrowers who are delinquent on their mortgages, even when they can afford the payment, because their loan balance exceeds the value of their home, • Cash flow manager - Borrowers facing delinquency issues with their mortgage because of temporary distress, but continue to make payments on all credit obligations, • Distressed defaulter - Borrowers facing potential affordability issues that go delinquent on their mortgage along with other credit obligations, • No non-real estate trades – Borrowers who are delinquent on their mortgage, however they do not have any other non-mortgage trades to evaluate if they have strategically defaulted or are in distress, • Pay-downs – Borrowers who pay down their mortgage loan. In my next blog, I will address the characteristic differences in behavior between these populations. Specifically, I will evaluate what characteristics make strategic defaulters stand out from the rest and what is unique about the cash flow managers. Source: Experian-Oliver Wyman Market Intelligence Reports; Understanding Strategic Default in Mortgage topical study / webinar. August 2009.