Significant Percentage of Borrowers Still Choosing to Default
A report jointly prepared by the Experian credit reporting bureau and the Oliver Wyman consulting firm revealed that a significant percentage of mortgage borrowers who default on their mortgage loans continue to choose to do so.
The phenomenon, called “strategic default”, has become one of the more lasting trademarks of the current mortgage crisis and appears poises to continue at least in the short to medium terms.
Borrowers who strategically default on their mortgage loans make the calculation that they would be better off financially if they stopped making mortgage payments on a home whose value has fallen to significantly less than the mortgage amount.
The firms reported that the trend hit a peak in the last quarter of 2008, when 20% of defaulting mortgage borrowers adopted a strategic default strategy. The tactic had fallen in popularity since, the firms said, but still remained high, coming in at 16% of all defaults in the last quarter of 2009 and 17% in the second quarter of 2010.
“It’s important for lenders to understand findings such as why about 90% of strategic defaulters are continuing to stay current on their other obligations — even a year after they’ve gone delinquent on their mortgage,” said Charles Chung, Experian’s president for decision analytics. “Knowing more about these behaviors helps lenders personalize strategies for consumers who have defaulted on their loans.”
The report also said that consumers with higher origination balances are more likely to strategically default. Of loan default customers with origination balances of less than $50,000, only 6% were strategic defaulters while 38% were distressed defaulters.
For those with loan origination balances of more than $1 million, one-third had strategically defaulted while only 20% had defaulted under distress, the firms said.