Strategic Defaults Down From Two Year Peak

Since strategic defaults peaked in Q4 2008, mortgages that are 60 days delinquent have fallen every quarter through the middle of 2010, Experian said in its Market Insight Snapshot report.

In 2008, strategic defaults accounted for 20% of all mortgage defaults. Through Q2 2010, strategic defaults were 17%.

“Although percentages slightly dropped since 2008, they still remain high creating a continual issue for lenders,” Experian said.

The report revealed that consumers with higher origination balances are more likely to strategically default. Out of those loan default customers with origination balances of less than $50,000, only 6% were strategic defaulters while 38% were distressed defaulters, according to the report.

For individuals with loan origination balances of more than $1 million, 33% had strategically defaulted while only 20% had defaulted under distress.

Borrowers who make a higher income are also more likely to become strategic defaulters. The report said there were only 9% of strategic defaulters who made an annual income of less than $40,000, while 23% of strategic defaulters had an annual salary between $100,000 and $150,000. Out of mortgage delinquents who had a yearly income of at least $150,000, 30% were strategic defaulters. 

A strategic defaulter is someone who has the capacity to pay a mortgage but chooses not to because the property is underwater. According to the report, almost half of strategic defaulters (47%) choose to open a new mortgage six months before their current mortgage becomes delinquent.

Charles Chung, president of decision analytics at Experian, said 90% of strategic defaulters continue to stay current on their other obligations even a year after they’ve gone delinquent on their mortgage.

The Costa Mesa, Calif.-based credit reporting firm said strategic defaulters are not going to decline unless housing prices increase.

“Homeowners have to see for themselves that their neighbors’ houses are selling for higher prices,” Experian said in the report. “So far, home prices nationwide continue to decline in most regions. Strategic default in mortgage continues to be an ongoing issue for many lenders, with no relief in sight.”