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Good Credit Scores, Deadbeat Choices
-- Two-thirds of strategic defaulters have only one mortgage -- the one they are walking away from is on their primary home. People with 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 pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore -- a joint venture created by Experian and the two other national credit bureaus, Equifax and TransUnion -- are far more likely to default strategically than people in lower score categories.
-- People who default strategically and lose their houses appear to understand the consequences of what they are doing. According to Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, strategic defaulters "are clearly sophisticated," based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines until after they bail out on their main mortgages, sometimes in order to draw down more cash on the equity line.
Although high scorers have lower overall default rates on all their credit activities than people with lower scores, it's much more likely that when they stop payments on mortgages, the default is intentional and calculated.
Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said in an interview, but they appear to look at it as a business decision: "Well, I'm $200,000 in the hole on my house, and yes, I'll damage my credit," he said of defaulters. But they see it as the most practical solution under the circumstances, and they won't have to deal with their negative equity albatross any further.
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 will probably just re-default on them anyway.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.