In my last blog, I discussed the presence of strategic defaulters and outlined the definitions used to identify these consumers, as well as other pools of consumers within the mortgage population that are currently showing some measure of mortgage repayment distress.
In this section, I will focus on the characteristics of strategic defaulters, drilling deeper into the details behind the population and learning how one might begin to recognize them within that population.
What characteristics differentiate strategic defaulters?
Early in the mortgage delinquency stage, mortgage defaulters and cash flow managers look quite similar – both are delinquent on their mortgage, but are not going bad on any other trades. Despite their similarities, it is important to segment these groups, since mortgage defaulters are far more likely to charge-off and far less likely to cure than cash flow managers.
So, given the need to distinguish between these two segments, here are a few key measures that can be used to define each population.
Origination VantageScore®
• Despite lower overall default rates, prime and super-prime consumers are more likely to be strategic defaulters
Origination Mortgage Balance
• Consumers with higher mortgage balances at origination are more likely to be strategic defaulters, we conclude this is a result of being further underwater on their real estate property than lower-balance consumers
Number of Mortgages
• Consumers with multiple first mortgages show higher incidence of strategic default. This trend represents consumers with investment properties making strategic repayment decisions on investments (although the majority of defaults still occur on first mortgages where the consumer has only one first mortgage)
Home Equity Line Performance
• Strategic defaulters are more likely to remain current on Home Equity Lines until mortgage delinquency occurs, potentially a result of drawing down the HELOC line as much as possible before becoming delinquent on the mortgage
Clearly, there are several attributes that identify strategic defaulters and can assist in differentiating them from cash flow managers. The ability to distinguish between these two populations is extremely valuable when considering its usefulness in the application of account management and collections management, improving collections, and loan modification, which is my next topic.
Source: Experian-Oliver Wyman Market Intelligence Reports; Understanding strategic default in mortgage topical study/webinar, August 2009.
