Nearly One In Five Defaults Is Strategic

gic defaulters made up 19% of all mortgage delinquencies in the second quarter of 2008, according to findings from Experian and Oliver Wyman, and the two firms say there is reason to believe the strategic-default phenomenon may have peaked or is close to peaking. In their first report on strategic defaulters, Experian and Oliver Wyman observed that strategic default occurs more often in areas where home-price declines have been the steepest. The refreshed report shows this trend continued into 2009, with strategic defaults running 80 times higher in California than in 2005 and 53 times higher in Florida. The defining characteristics of strategic defaulters include a higher number of first mortgages (i.e., investor borrowers with multiple first mortgages show a higher incidence of strategic default) and higher origination mortgage balances, as well as counterintuitive home-equity-line default behavior. The report finds that 50% of strategic defaulters who went delinquent on their home-equity line of credit did so before they went delinquent on their mortgage, compared to 70% for the overall population. Additionally, Experian and Oliver Wyman say strategic defaulters have higher scores acquiring to VantageScore, a credit scoring model created by Experian, Equifax and TransUnion. In the first half of last year, 28% of super-prime delinquents (i.e., a VantageScore between 901 and 990) became strategic defaulters – a 50% higher rate than in the overall delinquent population. Data from the first half of 2009 may contain the first signs of relief, the firms say. The report shows that the absolute number of strategic defaults for the first half of the year – 355,000 – as well as first-time mortgage delinquencies in general, declined in successive quarters in 2009, suggesting they may have peaked in the fourth quarter of 2008. ‘Both delinquency and strategic default – as we define these terms – continue at high levels, but in Q2 2009, we see the first evidence of a break in the upward trend,’ says Peter Carroll, partner at Oliver Wyman. The firms define strategic defaulters as those remaining delinquent for six months after the initial date of delinquency. ‘After a seasonal reduction in both measures from Q4 2008 to Q1 2009, the Q2 numbers then declined further, breaking the historical trend of quarter-over-quarter increases; however, we will need to analyze the data from Q3 and Q4 to validate this.’ The incidence of ‘cashflow managers’ – temporarily distressed borrowers whose payment behavior closely mimics strategic defaulters' but who continue to make occasional payments on their mortgage – rose from 20% in 2008 to 26% in the first half of 2009. ‘Cashflow managers would be better candidates for loan modification programs than strategic defaulters,’ comments Charles Chung, Experian's general manager of decision sciences. ‘They are likely to be in temporary distress and may also have financial resources which allow them to continue to pay their non-mortgage obligations. This clearly demonstrates a willingness to pay, and a loan modification that makes their mortgage payments more affordable is likely to be very effective.’ SOURCES: [link=]Oliver Wyman[/link], [link=]Experian


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