Fico, the creator of the almighty Fico score, says enhancements in its analytic modeling allow it to identify borrowers who are over 110 times more likely to strategically default than the least riskiest borrowers.
A strategic default refers to those who are able to make mortgage payments, but instead decide to default and go into foreclosure as a means of cutting their losses, despite the related credit score damage.
The company divided the population into high versus low strategic default risk bands, and found that the riskiest 20 percent of borrowers included 67 percent of those who eventually strategically defaulted.
This means loan servicers could potentially reach two-thirds of those who would commit strategic default by targeting just 20 percent of borrowers.
The data also revealed that these homeowners also tend to be more “savvy managers of their credit,” exhibiting higher Fico scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage.
Interestingly, the new FICO Labs research also indicates that borrowers who have lost the most home value are only twice as likely to default as those whose houses have lost the least value.
This counters previous studies, which argued that home price depreciation is the leading driver of strategic default.
A study from the University of Chicago Booth School of Business indicated 35 percent of mortgage defaults in September 2010 were strategic, up from 26 percent in March 2009, so it’s clearly a concern for lenders and loan servicers alike.