Lenders Fight Back Against Strategic Defaulters

NEW YORK (MainStreet) -- Looking to get ahead of the game, four major U.S. mortgage firms have turned to the credit-scoring firm FICO to pre-emptively strike out at strategic defaulters. It's a unique gambit, with a new model to fight back against homeowners who walk away from their mortgages. But will it work?

FICO is already linked to the strategic default issue, although primarily in an observational and analytical way. The Minneapolis-based FICO announced on Oct. 10 that it would supply “predictive analytic” services to four major U.S. mortgage servicers to “identify borrowers at the greatest risk of strategic default”.

"Distressed borrowers are increasingly likely to see strategic default as a viable or necessary option, but such decisions are devastating to not just their own credit profiles but also lenders’ portfolios and the economy as a whole,” explains Greg Pelling, vice president of scores and analytics at FICO, in a press release.

The credit-monitoring firm recently noted that approximately 6 million homeowners are at least 20% underwater on their home mortgages. Another study from the University of Chicago School of Business said that 35% of mortgage defaults in September 2010 were “walkaways” – or strategic defaults. In March 2009, that number was just 26%, suggesting that the problem is growing as the economy continues to crab along more sideways than forward.

In addition, FICO estimates that strategic defaults are a $20 billion problem for mortgage lenders that should get even worse. The company says that “first notice of default” mailings climbed 33% in August 2011, and FICO housing industry analysts don’t expect the problem to abate until 2020.

Now FICO will help lenders figure out just which borrowers have the best chance of walking away from their homes – and home loans – with a new formula. The company claims that the four mortgage servicers who have hired FICO stand to save $2 billion by targeting likely strategic defaulters.

“Fortunately, the technology exists to reverse the trend toward strategic defaults,” Pelling says. “Our goal is to help the industry implement that technology as quickly as possible.”

Mortgage servicers increasingly believe that such predictive analytics are an insurance policy against homeowners dumping their keys in the mailbox and walking away. With profit margins thin enough as it is, having the data on hand to I.D. likely defaulters becomes sort of a de facto profit center of its own.

“Recent economic turbulence has made it critical for the already-depressed mortgage industry to develop more sophisticated account-management strategies,” said Craig Focardi, senior research director at TowerGroup, in a press release. “Preventing strategic defaults through the use of analytics is especially worth looking into, because this technology has the ability to help lenders make sense of strategic default, identify borrowers who are most at risk and minimize related losses.”

FICO won’t identify the four mortgage servicers in question, but four of the 10 largest U.S. mortgage servicers definitely signifies a trend – one where the mortgage industry is trying to get one step ahead of a growing problem.

By hiring FICO, which tracks 10 billion credit scores worldwide, mortgage servicers are declaring war on “walkaway” homeowners.

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