Borrowers who engage in "strategic defaults" after their home’s value has plummeted tend to be more savvy about credit than the population at large, with higher FICO scores, lower revolving debt balances, and lower retail credit card usage.
That’s according to a study by Fair Isaac Corp., developer of the FICO score, which says it’s helping lenders identify borrowers who are most likely to engage in strategic defaults.
In a strategic default, "underwater" borrowers who owe more on their mortgage than their home is worth stop paying their mortgage — not because they can’t afford the monthly payments, but because they don’t believe their home will regain its value anytime soon.
Home-price declines have left 11.1 million homeowners underwater, according to a study released in March by loan data aggregator CoreLogic. Studies by the University of Chicago Booth School of Business have estimated that 31 percent of mortgage defaults in March 2010 were strategic, up from 22 percent in March 2009.
Fair Isaac has also been studying the impacts of mortgage delinquencies, short sales, foreclosures and bankruptcies on credit scores.
"There’s no significant difference in score impact" between a short sale and a foreclosure, the company said in a blog post about its studies.
Looking at three "representative profiles" of consumers with scores of 680, 720, and 780, FICO found that those with the best credit scores took the greatest hit on their scores when falling behind or defaulting on a mortgage, and also took the longest to rebuild their scores.