17% of Defaults Called Deliberate
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- Kirk Haverkamp | June 24, 2011
Nearly one in five borrowers who default on their mortgages does so deliberately despite being able to keep up with their payments, according to a major credit reporting agency.
So-called “strategic defaulters” are homeowners who make a conscious decision to stop making their mortgage payments because they owe more than their home is worth - a situation commonly called being "underwater" on the mortgage. In nearly all cases, they continue to stay current on their other bills, according to the report. And nearly half of them took out a new mortgage shortly before defaulting.
In a new study, the credit reporting company Experian found that 17 percent of all mortgage defaults were by strategic defaulters in the second quarter of 2010, the most recent period for which data is available. While that is down somewhat from the peak of 20 percent of defaults in the last quarter of 2008, the company concludes the figure is unlikely to change significantly until home prices begin rising again.
Wealthier more likely to opt for strategic default
What’s striking about strategic defaulters is that they tend to be considerably better-off financially than other homeowners who go into default. The Experian study found that rates of strategic default increase along with the size of the mortgage and the borrower’s income – the more expensive the home and the wealthier the borrower, the more likely a default was likely to be deliberate.
For example, one-third of defaults on mortgages over $1 million were strategic, according to the study. By comparison, only 10 percent of defaults on mortgages with origination balances between $50K-$99K were deemed to be strategic.
Similarly, 30 percent of defaulters with annual incomes over $150,000 were identified as strategic defaults, while only 9 percent of those earning less than $40,000 a year were deemed to be strategic.
Other studies have characterized strategic defaulters as financially savvy persons who see default as a straightforward financial strategy. They have concluded that it does not make financial sense to keep making payments on a home that may have lost one-third of its value or even more.
In fact, the study found that 90 percent of strategic defaulters continue to remain current on their other debts in the six months after default. In addition, 47 percent were found to have taken out a new primary mortgage within six months of defaulting, suggesting they may have been securing a new home before giving up on the old one.
More defaulters making occasional payments
While strategic defaults have remained fairly steady over the past few year, Experian found that the share of defaults represented by people identified as cash-flow managers – those in default who continue to make occasional payments – has steadily increased.
Cash-flow managers made up 39 percent of all defaults in the second quarter of 2010, compared to 23 percent two years earlier. The report says this suggests distressed homeowners are gaining the ability to make occasional mortgage payments, which may be an optimistic sign for the future.
Just opposite of strategic defaults, the likelihood a borrower will be a cash-flow manager increases with smaller original mortgage balances and lower incomes, according to the report.
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