Experian Says Phenomenon of “Strategic Defaults” May Have Peaked
Original Post Date: June 28, 2010
By: Carrie Bay
A new study released Monday by data service provider Experian finds that nearly 1 in 5 mortgage delinquencies during the second quarter of 2009, or 19 percent, was the result of a borrower intentionally, strategically defaulting.
The company called the share of walk-aways “high,” but said “there is reason to believe the phenomenon may have peaked, or be close to peaking.”
The study, developed in conjunction with the international business consulting firm Oliver Wyman, shows that the absolute number of strategic defaulters — which the companies define as those who miss six straight mortgage payments without missing payments on other consumer debts such as credit cards or car loans — totaled 355,000 during the first half of last year.
But the data shows that strategic defaults, as well as first-time mortgage delinquencies in general, declined in successive quarters in 2009, suggesting they may have crest in Q4 2008, the companies said.
“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,” explained Peter Carroll, partner at Oliver Wyman.
“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,” Carroll said, but he noted that the companies will be extending the analysis to cover data from the third and fourth quarters of last year to validate their assumption that strategic default is on the decline.
The report also noted that the incidence of “cash-flow managers” rose from 20 percent in 2008 to 26 percent in the first half of 2009. The companies refer to the term cash-flow managers as temporarily distressed borrowers whose payment behavior closely mimics strategic defaulters. However, this group of borrowers continue to make occasional payments on their mortgage, perhaps indicating their intention to get out of delinquency.
“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 Experian-Oliver Wyman study also pinpointed several common characteristics of strategic defaulters, some of which may be surprising.
Borrowers with multiple first mortgages — i.e., investors — show a higher incidence of strategic default, they concluded.
In addition, in the first half of 2009, 28 percent of what the companies called “super-prime delinquents,” meaning they possessed a VantageScore credit rating between 901 and 990, became strategic defaulters. That’s a 50 percent higher rate than the share of strategic defaulters when looking at the overall delinquent population.
Customers with higher mortgage origination balances are more likely to strategically default, the report said. The study also found that incidence of strategic default is largely concentrated in areas where home price declines have been the steepest, with strategic defaults running 80 times higher in California during the first half of 2009 than they did in 2005, and the ratio in Florida 53 times higher.
The report also honed in on counterintuitive home-equity line default behavior. The companies found that strategic defaulters who also have home-equity lines are more likely to stay current on those lines prior to mortgage default.