Your mortgage payments are up to date, and you pay your bills on time. Your credit score is above average.
Uh-oh. Could be trouble.
At least, that's what their data suggest to them. Fair Isaac Corp., or FICO, the company that developed widely used credit-scoring systems, recently announced it has devised data tools to help lenders pinpoint those otherwise-stable borrowers who can afford to make their monthly mortgage payments but intentionally default because they think it's no longer in their financial interest.
Can FICO read their minds? No, but the company thinks it can zero in on certain behavior, said Joanne Gaskin, FICO's product management director for scores. She said these programs make it possible to know which 20 percent of accounts represent nearly 70 percent of a lender's strategic-default risk.
Gaskin explained how lenders are starting to identify potential walkaways and what they might be doing about them:
Q. Why did lenders and loan servicers ask FICO to develop these programs to identify likely strategic defaulters, people who haven't been anything other than good borrowers?
A. Our (lender) clients came to us and said this is beginning to be a growing problem. A study by the University of Chicago's Booth School of Business found that during September alone, 35 percent of mortgage defaults in the U.S. were strategic, up sharply from 26 percent in March 2009.
We're not certain strategic defaulters really understand the total ramifications of walking away. People may understand a portion of it, but I don't know if they understand that there are places where walking away could have ramifications: getting cellphone accounts or insurance, or having landlords check your credit, for example. Consumers who commit strategic default may see a hit of 150-plus points to their credit scores.
Q. Who are these likely strategic defaulters, and how does your program recognize them?
A. We studied a random sample representing 5 percent of the mortgage-holding population in October 2008 and looked at strategic default for this population during a 12-month window through October 2009. We included credit bureau and property valuation data to analyze consumer credit-behavior patterns with real estate market factors.
We concluded the strategic defaulters (as opposed to borrowers who default because they're in dire financial straits) have good credit histories (and) better-than-average FICO scores, better than 660 (on a scale up to 850). They have lower utilization of available credit; they're less likely to have maxed out their credit cards. They spend their money carefully.
It also appears that they have a shorter-than-average length of residency in their property: two to three years. And their homes are underwater.
There's also a pattern of preparation, of opening lines of credit prior to their delinquency. These strategic defaulters did seek out that new credit card in the past six months or that new auto (before walking away from the house). The only thing you see, outside of good credit, is the number of inquiries (from companies that might be considering extending them more credit).
Q. Once lenders pinpoint the borrowers they think could be walkaways, how will they be reaching out to encourage them to understand the ramifications of deliberate default?
A. Some servicers are grooming special teams to contact potential strategic defaulters. We understand that the lenders may be writing letters, making phone calls, knocking on doors — however you can reach the borrower. All of those techniques are being used today. They can help customers work through the alternatives and trade-offs.
Q. Is this Big Brother-ish, as suggested in the blogosphere?
A. We haven't heard that. We're trying to provide the best possible tools to the servicers, so they can help preserve homeownership. We see people walking away as hurting everybody: the neighborhood, investors, etc. It's not a good practice at all.
There are tremendous analytics today to understand consumer behavior and predict it. Netflix, for example, uses something akin to that to help you find movies you'd enjoy watching. FICO has a business arm that we engage with retailers to profile buyers who are most likely to buy a given item.
Q. Would you have predicted five years ago that you'd be seeing such a change in attitudes toward the notion of preserving a homestead through tough times?
A. We certainly didn't predict this five years ago. We've always seen cyclicality in the real estate business, but I don't think anyone predicted the severity of the delinquencies and the resulting consumer behavior.
We're seeing a new paradigm here. People are putting other bills ahead of the house payment today. Before, the mindset was always protect the house; the priority payment was always the mortgage. Sadly, credit cards have become the priority payment. It has to do with potential economic stress, job loss or underemployment. If they have open credit cards, they might be living off those and have to keep them current. They need to hold on to their cars to get to work.
But these people aren't the strategic defaulters, who can make their mortgage payments but just choose not to.