Well-Heeled Borrowers More Likely to Opt for Strategic Default

By:
Kirk Haverkamp | June 30, 2010

It may seem strange, but borrowers with outstanding credit and expensive homes are more likely than other homeowners to strategically default on their mortgages after falling behind on their payments. 

That’s according to a new study released this week by the credit reporting firm Experian and the Oliver Wyman management consulting firm.
 
The study found that 28 percent of all “super-prime” borrowers, those with the best credit scores, who were delinquent on their mortgages in early 2009 eventually chose to stop paying their mortgages, even though they could afford to do so. That rate was 50 percent higher than for delinquent homeowners overall.
 
Delinquent borrowers who originally took out more expensive mortgages were also found to be more likely to default than delinquent borrowers in general.
 
Those figures would seem to indicate that homeowners in those categories are more willing than others to cut their losses on a property where the property value has fallen below the balance owed on the mortgage. Investors with mortgages on multiple properties were also more willing to deliberately default after falling behind on their payments.
 
Overall, the study found that nearly one-fifth of all mortgage delinquencies in the second quarter of 2009 were strategic defaults. Even so, it reported that the trend may have already peaked by that time, with both first-time delinquencies and strategic defaults declining in the first two quarters of the year, following high points in the fourth quarter of 2008.
 
The study also found that “cash-flow managers,” persons who are delinquent on their mortgages but continue to make occasional payments, perhaps as a demonstration of good faith, increased from 20 to 28 percent of delinquencies in the first half of 2009.
 
"Cash-flow managers would be better candidates for loan modification programs than strategic defaulters," said 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."
 
The study defined “super-prime borrowers as those with credit scores of 901-990 on a scale of 501-990. The VantageScore credit rating system is one the three major credit rating companies introduced in 2006 and uses somewhat different criteria than the more familiar FICO credit scores.

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