Who are the Strategic Defaulters?

I have discussed strategic defaulters in previous blogs.  To refresh your memory, strategic defaulters stay current with their debts but default on their mortgage because they have negative equity or are “upside down.”  They can afford to pay their mortgage, but choose not to do so.

FICO study

FICO conducted research on strategic defaulters compared to those that go delinquent (90 days or more late).  They identified the following characteristics:

Strategic defaulters have a higher FICO score and have had good payment history.

They haven’t used much of their credit limit on their credit cards, so their utilization is low.

They spend less on retail cards and have low balances.

They have lived at their residence for a shorter period of time.

They have opened more credit in the past six months.

These individuals are not easy to identify by using credit scores to predict credit risk. They don’t fit the usual characteristics of those that are a poor credit risk, such as are currently and/or historically delinquent on some of their accounts, credit cards are highly utilized (close to their credit limit), spend more on retail cards, and opened new credit recently. FICO has developed an algorithm to predict who will be a strategic defaulter, which is being sold to the mortgage industry.

Experian study

Experian, one of the three U.S. credit reporting agencies, conducted a study on strategic defaulters.  Here are the results of their study:

Strategic defaulters are more likely to have a jumbo mortgage.

They had high credit scores.

They have had more than one house or investment property.

They have a higher than average household income.

They stay current on all their other bills (other than their mortgage).

Strategic defaulters can make their mortgage payments, but they are walking away because of negative equity.  They feel this is the only way out of a situation that will not improve for some time.  They are not looking at this issue from the impact it will have on their credit.  A foreclosure, deed in lieu or short sale will have a major negative impact on their credit. It will take several years to recover their once great credit scores.

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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This post was written by John Ulzheimer