Today FICO® revealed the results of a new study profiling the “strategic defaulter.” A strategic default is the process whereby a homeowner walks away from his home despite being able to afford the payments. The results indicated that the likely strategic defaulter looks very much like a low risk borrower.
Executive Summary
Consumers with higher FICO scores are MORE likely to walk away from their homes despite being able to continue making payments
Normally, you’d expect more of your defaults toe from consumers who fall into lower FICO score ranges. And, normally you’d be right. But strategic defaulters are consumers who are more savy and focused on getting out of a bad financial situation. According to the chart below from the FICO study it appears that ~46% of strategic defaulters score above 660. It also suggests that strategic defaulters are willing to sacrifice their good/great FICO scores in exchange for getting out of a bad mortgage loan.
Consumers with higher revolving utilization percentages are LESS likely to walk away from their homes
Again, normally you’d expect more of your defaults toe from consumers who have very highly utilized credit cards, thus having a hard time making payments on expensive credit card debt. Again, normally you’d be right. In fact, according to the chart below ~40% of strategic defaulters have a utilization percentage below 30%. Conversely, only~18% have utilization greater than 90%.
Consumers with lower retail balances and more newly opened credit in the past 6 months are MORE likely to walk away from their homes
The FICO results just keep getting more and more bizarre. Their study showed that consumers who actually have lower retail balances, often THE most expensive kind of debt, characterize the strategic defaulter. And, they’ve opened more new credit in the recent months. This makes perfect sense as strategic default is a premeditated act. Having new credit (opened well in advance of the negative credit reporting caused by strategic default) to ride out the storm isn’t a bad idea. You won’t be able to get new credit for a few years, or longer, after you’ve walked away from your mortgage.
Consumers who have been in their homes a shorter period of time are MORE likely to walk away
Finally, an intuitive finding. Consumers who have lived in their homes for a short period of time likely have little or no skin in the mortgage game. In fact, they’re more likely to OWE the lender some skin in the form of negative equity (upside down). You’re also less attached to the neighborhood and surrounding areas.
To review the full FICO study please go here.
John Ulzheimer is the President of Consumer Education at SmartCredit, the credit blogger for Mint, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit, John
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