David Dodd 1:48 a.m., May 18
FICO to Help Banks Target Strategic Defaulters
Credit analysis firm FICO announced this week that it has formed relationships with four of the nation’s top ten loan servicers to help identify borrowers with a high risk of “strategic default.” In such a situation, a borrower who is otherwise able to make mortgage payments decides it is in their best financial interest to stop payment and to allow a property to be foreclosed by a lending bank. These individuals make up approximately 35% of all borrowers delinquent on payments. The four participants were not named in the announcement.
FICO focuses on customers who have loan-to-value ratios of 120% or more, as individuals who owe far more than their homes are worth are less likely to consider the property a sound investment. With home values down across San Diego County 5.88% compared to a year ago, the number of homeowners with negative equity continues to climb. Not surprisingly, San Diego foreclosure rates remain higher than the rest of the nation.
Strategic defaulters tend to have a higher overall credit score and carry less credit card debt, FICO reports. One of its suggestions to lenders trying to convince borrowers to continue paying on loans absent any equity incentive is to remind borrowers of the credit damage they can incur. A foreclosure can cause a consumer’s credit score to fall 150 points or more, and lending giant Fannie Mae announced last year that it will bar loans to any borrower with a foreclosure on record for seven years from the foreclosure date. It’s hoped that the fear of a lower credit rating and subsequent loss of borrowing power will cause consumers to continue pouring money into “upside-down” homes as long as they are able to do so.
Another tactic suggested is the establishment of a single point of contact for delinquent borrowers, instead of putting them on an auto-dialer system where they receive random collection calls from an individual unfamiliar with their account or situation. FICO recommends these case managers be trained “to engage in a pragmatic, rational discussion that corresponds to and joins with the thinking process in which these customers are already engaged.” The company indicates that sophisticated borrowers who maintain strong credit profiles are more likely to view a loan in terms of their own financial benefit, rather than as a moral obligation to a bank.
FICO says that the algorithms it has developed to help banks identify potential strategic defaulters both behind on payments and who are still current could provide a collective benefit for its clients of up to $2 billion in the first year of the program alone.