A study of borrowers who could afford to continue paying their mortgages but chose a "strategic default" because they owed more than their home was worth suggests the practice peaked at the end of 2008.
But strategic defaults won’t be going away anytime soon, and are suspected to be motivation for one out of every five mortgage delinquencies during the second quarter of 2009, new research from Experian and Oliver Wyman shows.
The most recent data, from the first half of 2009, suggests there were 355,000 strategic defaults during that period. But the two consecutive quarterly declines from fourth-quarter 2008 point to a trend reversal.
Data from the second half of the year must be analyzed before that can be confirmed, Oliver Wyman partner Peter Carroll said in a press release.
Real estate information aggregator CoreLogic has estimated that at the end of 2009, 11.3 million homes were worth less than what their owners owed on their mortgage.
About 24 percent of all residential properties with mortgages were "underwater," and CoreLogic estimated that most of those homes won’t be in the black until late 2015 or early 2016. In some depressed markets, underwater borrowers may not have any equity in their homes until 2020 or later, CoreLogic said in a report issued in March.
The temptation for many of those borrowers to simply walk away from their homes is a concern for lenders.
Fannie Mae announced last week that in states where the law allows, it will seek deficiency judgments against borrowers who engage in strategic defaults, and will deny credit to those borrowers for seven years.
The new research from Experian and Oliver Wyman sheds light on the characteristics of borrowers who choose to default on their home loans.
While it’s no surprise that they are more likely to be investors with multiple first mortgages, the study also found borrowers with "super-prime" credit scores opted for strategic defaults at a 50 percent higher rate than the overall population of delinquent borrowers.
Higher mortgage-origination balances were also a predictor of strategic default, even after accounting for geography, number of first mortgages, and credit score.
Another revelation: 70 percent of delinquent borrowers who had home-equity lines of credit defaulted on those loans first before falling behind on the payments on their first mortgage. But among those who engaged in strategic defaults, half were reportedly still making payments on their first loans when they fell behind on their first mortgage.
The report noted an increased incidence in the proportion of delinquent borrowers who continue to make occasional payments on their mortgage. These so-called "cash-flow managers" accounted for 20 percent of delinquent borrowers in 2008, and 26 percent in the first half of 2009, the study found.
Cash-flow managers are better candidates for loan modifications than strategic defaulters, said Experian’s Charles Chung, because they are likely to be in temporary distress and have demonstrated a willingness to pay.