Bankers Warn About Strategic Default Risk in 2012

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The foreclosure crisis is loosening the traditionally strong tie homeowners have with their homes. New findings from FICO’s latest quarterly survey of bank risk professionals indicate one way the slow recovery will affect distressed homeowners in 2012 is increased propensity for “strategic default.”

Up to 46% of the respondents expect the volume of strategic defaults in 2012 will surpass 2011 levels given that over 25% of U.S. homeowners are “under water” or owe more on their mortgages than their homes are worth.

Lenders need look beyond the legal and ethical aspect of “strategic default” risk when they evaluate mortgage applications in declining markets, said Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. "After five years of a brutal housing market, many people now view their homes more objectively and with less sentimentality." 

Participants in the survey expressed concerns about changes in customers’ attitudes towards payment hierarchy and debt obligations.

When asked whether the current generation of homeowners sees mortgage as their “most important credit obligation,” 49% of these bankers said no, compared to 29% who said yes.

It means more homeowners who find themselves upside down on mortgages in the future “are likely to consider strategic default as an acceptable exit strategy," Jennings said.

FICO reports however that lenders “seem to believe” the housing market is stabilizing as 26% expected delinquencies on mortgages to decline in the coming months, which is higher than at any previous time in the two years FICO has been conducting this survey. 

Over half, 53% of respondents, expect the housing market will improve by the end of 2012, compared to 24% who expect it to deteriorate.

Despite increased optimism about the recovery, FICO analysts find, “whether strategic or not,” defaults continue to be problematic until improvements in the job market help change the dynamics in housing through better credit quality and reduced default risk.

Conducted by FICO in collaboration with the Professional Risk Managers' International Association and the Columbia Business School's Center for Decision Sciences, the survey includes responses from 263 risk managers at banks throughout the U.S. in February 2012.