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Default Strategies

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Mortgage Daily

                                                 June 23, 2011

A new study found that strategic defaults on negative-equity properties are more likely with borrowers who make more and have bigger loans. The good news is that such defaults have declined.

At the end of 2008, 20 percent of U.S. mortgages that were at least 60 days behind were a strategic default. The most recent available data for the second-quarter 2010 show that the share has fallen to 17 percent.

The findings were outlined in a report released Thursday from Experian, Market Insight Snapshot. The report was prepared with the help of Oliver Wyman.

But despite the decline, Experian said no further retreat is likely until home prices strengthen.

“Homeowners have to see for themselves that their neighbors’ houses are selling for higher prices,” Experian explained. “For mortgage lenders, the latest strategic default figures suggest the issue will continue to be a problem for the next few years given their account management queues.”

The segment of capable borrowers most likely to deliberately default is those in higher-balance loans. Only 6 percent of delinquent borrowers with balances less than $50,000 utilized the strategy, while one-third of borrowers who had defaulted on loans greater than a million dollars were strategic defaulters.

The same relationship existed with income. While just 9 percent of borrowers with yearly income of less than $40,000 stopped paying even though they could afford the payments, the proportion shot up to 30 percent when incomes exceeded $150,000.

Experian noted that 47 percent of strategic defaulters opened a new mortgage during the six months prior their defaults.

“This behavior further supports the evidence that these mortgage defaulters were doing so strategically,” the report said.

In addition, around nine-in-10 strategic defaulters remained current on other obligations as much as a year past the default.

The report indicated that strategic defaulters were half as likely to default on credit cards as distressed consumers.

One of the first steps servicers should take, according to the report, is to differentiate strategic defaulters from borrowers who are struggling to make occasional payments. Strategic defaulters are less likely to take advantage of loan modifications than struggling borrowers, who were referred to as “cash flow managers.”

Experian touted how its services can help lenders best manage the problem.

Another finding from the report was that more distressed borrowers have recently been making more payments, a development Experian said “may hold some optimism for future quarters.”

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