Strategic Defaults May Have Peaked Last Year

Despite the recent publicity and current debate about homeowners who walk away from their mortgages even thought hey have the ability to pay; the phenomenon of “strategic default” may have peaked before it was identified.

According to updated findings from Experian and Oliver Wyman, strategic defaulters, who they define as remaining delinquent for six months after the initial date of delinquency, continued as a high percentage of all mortgage delinquencies at 19 percent in the second quarter of 2009.  However, the researchers believe the phenomenon may have been in decline for more than a year.

Data from the first half of 2009 shows that the absolute number of strategic defaults for the first half of the year, 355,000, as well as first-time mortgage delinquencies in general, declined in successive quarters in 2009, suggesting that walk-aways may have peaked in Q4 2008.  The term “strategic default” had yet to be coined when a study by researchers at the University of Chicago and Northwestern last summer identified that one out of four homeowners who default on their mortgages make a strategic decision to clear out their belongings and walk away from their homes-even if they can afford to pay their mortgages.

“Both delinquency and strategic default — as we define these terms — continues at high levels, but in Q2 2009 we see the first evidence of a break in the upward trend. After a seasonal reduction in both measures from Q4 2008 to Q1 2009, the Q2 numbers then declined further, breaking the historical trend of quarter-over-quarter increases; however, we will need to analyze the data from Q3 and Q4 to validate this,” said Peter Carroll, partner at Oliver Wyman.

The first Experian-Oliver Wyman Market Intelligence Report demonstrated that strategic default occurs more in areas where home price declines have been the steepest. The refreshed report shows this trend continued into 2009, with strategic defaults running 80 times higher in California than in 2005 and 53 times higher in Florida.

The incidence of temporarily distressed borrowers whose payment behavior closely mimics strategic defaulters but continue to make occasional payments on their mortgage, perhaps indicating their intention to get out of delinquency, rose from 20 percent in 2008 to 26 percent in the first half of 2009.

“Cash-flow managers would be better candidates for loan modification programs than strategic defaulters,” said Charles Chung, Experian’s general manager of Decision Sciences. “They are likely to be in temporary distress and may also have financial resources which allow them to continue to pay their non-mortgage obligations. This clearly demonstrates a willingness to pay, and a loan modification that makes their mortgage payments more affordable is likely to be very effective.”

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