Who is more likely to walk away from a house and a mortgage — a person with super-prime credit scores or someone with lower scores?
Hint: It’s probably not who you think. New research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50 percent more likely to “strategically default” — abruptly and intentionally pull the plug and abandon the mortgage — compared to lower-scoring mortgage borrowers.
Experian, one of the three national credit bureaus, teamed with consulting company Oliver Wyman to identify the characteristics and debt management behavior of the growing numbers of homeowners who bail out of their mortgages with none of the expected early warning signs, such as nonpayments.
Unlike earlier academic studies, Experian and Wyman’s study had the ability to tap into credit files over extended periods of years to identify patterns associated with strategic defaults. Among researchers’ findings are these eye-openers:
• The number of strategic defaults is beyond most industry estimates — 588,000 nationwide last year, more than double the total in 2007. They represented 18 percent of all serious delinquencies that extended for more than 60 days during the fourth quarter of last year.
• In contrast with most types of mortgage delinquencies, strategic defaulters often go straight from perfect payment histories to no mortgage payments. This differs from most financially distressed borrowers, who try to keep paying their mortgage even after falling behind on other accounts.
• Strategic defaults are heavily concentrated in negative-equity markets, where home values zoomed during the boom and have cratered since 2006. In California last year, the total number of strategic defaults was 68 times higher than it was in 2005. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005. Loans originated across the country in the pivotal market-turn year of 2006 have produced seven times more walkaways than loans originated in 2004.
• Two-thirds of strategic defaulters have only one mortgage. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.
• Homeowners with large mortgage balances generally are more likely to default than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore — a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion — are far more likely to default strategically.
• People who default strategically and lose their house appear to understand the consequences of what they’re doing. According to Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, strategic defaulters “are clearly sophisticated.”
While high scorers have lower overall default rates, it’s much more likely that when they stop payments, the default is intentional.
Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision.
The Experian-Wyman study does not attempt to explore the ethical or legal aspects of mortgage walkaways. But it does suggest that lenders and loan servicers take steps to screen and identify strategic defaulters in advance and possibly avoid offering them loan modifications, since they’ll probably just re-default on them anyway.
Ken Harney is a real estate columnist with the Washington Post.