Some borrowers can’t keep up with their mortgage payments because they’re struggling to make ends meet.
Others choose not to keep up even though they can afford their monthly payments, and a new picture is emerging about who these borrowers are and why they walk away.
A growing body of research shows that these so-called “strategic defaulters” defy the tell-tale characteristics of most people whose loans go bad. They pay their bills on time, rarely exceed their credit-card limits and hardly use retail credit cards, according to a study released Thursday.
And they plan ahead.
They know their credit scores will take a hit after they fall behind on their mortgages, so they tend to open new credit cards in advance of defaulting, according to Thursday’s study, conducted by FICO, the firm that created the nation’s most widely used credit scoring system.
“These are savvy people who organize themselves,” said Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.”
This relatively new type of behavior is the latest sign of just how profoundly the mortgage crisis has reshaped consumer attitudes toward their homes and their finances. It is largely driven by plunging home values, which have left nearly a quarter of the nation’s homeowners underwater, or owing more on their mortgages than their homes are worth.
So some do the math and walk.
A team of researchers estimated that 35 percent of defaults in September may have been strategic, up from 26 percent in March 2009. But they acknowledge in a report published last month that the numbers are tough to tease out because “strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,” according to the report by researchers from the European University Institute, Northwestern University and the University of Chicago.
That’s because lenders have become more aggressive about trying to recoup money lost on foreclosures, and they’re chasing after borrowers who they suspect have skipped out on a loan they could have paid.
In many localities — including Virginia, Maryland and the District — lenders have the right to pursue those borrowers and collect the difference between what the property sold for in foreclosure and what the borrower owed on it, also called a deficiency.
A handful of states do not allow lenders to pursue deficiencies. But in states that do, the laws vary widely. Some states limit how long the banks have to file a claim or collect the debt. Others may calculate deficiencies based on the fair-market value of the house. For instance, if a home sells for $200,000 yet its fair market value is $250,000, the borrower who owes $240,000 on the mortgage would not have a deficiency.
Read more at The Washington Post.