Consumer credit analytics firm FICO (FICO) said mortgage servicers need to take a more proactive approach with borrowers they feel are likely to strategically default on their mortgage. The prevention of future litigation costs, FICO said, is alone worth the effort. “Within the current population, the goal is to spot likely strategic defaulters before a delinquency develops, enabling servicers to intervene early,” FICO said Wednesday in a blog post. Mortgage servicers should give potential strategic defaulters advice on other ways to relieve their mortgage burden such as a short sale or loan modification, the company said. Mortgage lenders and servicers have said they are more likely to seek a deficiency judgment if they perceive the borrower to be a strategic defaulter. The Wall Street Journal reviewed hundreds of foreclosures in seven states and found the average amount by which foreclosure sales fell short of loan balances was roughly $100,000. The review found 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments. Florida is one of the biggest deficiency judgment states. Since the beginning of 2007, it has had more foreclosures than any other state that allows deficiency judgments –more than 9% of the U.S. total, according to research firm Lender Processing Services Inc. A growing national secondary market of deficiency judgments could lead to a bundling of those judgments into packages that resemble mortgage-backed securities, some investors say. Strategic defaulters behave differently from traditional mortgage defaulters in that the former generally have higher FICO credit scores, exhibit better credit management behavior and live on the property for a shorter length of time and therefore are less attached to it. Strategic defaulters can afford to make payments on their loan, but do not because they are “underwater,” meaning they owe more on their mortgage than their house is worth. Traditional defaulters generally do so because they cannot afford the payments. Write to Justin T. Hilley
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