Strategic default refers to a relatively new phenomenon where borrowers who have the capacity to make their mortgage payments but choose instead to default, often because the property value is less than what they owe on the mortgage loan. Last year, the practice had become such a concern within the industry that Fannie Mae announced policy changes aimed at stepping up penalties against borrowers who simply walked away from their mortgage obligations even though they had the ability to continue payments. But the problem is, how do you pinpoint a strategic defaulter? The credit assessment firm FICO says it’s developed a method, using consumer behavior analytics, that will allow lenders to identify borrowers who are a risk for strategic default.
Through the use of custom analytic models, FICO Labs researchers say they have demonstrated the ability to identify borrowers who are over 100 times more likely to default strategically than others. They say, as a group, strategic defaulters tend to be more savvy managers of their credit than the general population, with higher FICO scores, lower revolving balances, fewer instances of exceeding limits on their credit cards, and lower retail credit card usage.
All factors point to the fact that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments.
“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” said Dr. Andrew Jennings, chief analytics officer at the Minneapolis-based FICO and head of FICO Labs. “Before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them.” Experts say continued weakness in the mortgage sector is driving greater numbers of strategic defaults. Studies from the University of Chicago Booth School of Business indicate that in September 2010, 35 percent of mortgage defaults were strategic, up from 26 percent in March 2009.
The FICO Labs team built strategic default analytics to test the ability to rank-order both current and delinquent borrowers by their likelihood of strategically defaulting on their mortgage. The company says their custom models “achieved excellent separation of borrowers into high versus low strategic default risk bands.” Among current borrowers, the riskiest borrowers were found to be 110 times more likely to commit a strategic default than the least risky borrowers. The riskiest 20 percent of borrowers included 67 percent of those who later committed strategic default.
In other words, a servicer could reach two-thirds of those who would commit strategic default by targeting just 20 percent of its borrowers, FICO says. “The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early,” said Dr. Jennings. “Strategic defaults are bad for lenders and investors, they’re bad for the homeowners who elect to default and they’re bad for neighborhoods and cities. Preventing them is in the interests of everyone involved.” FICO is already consulting with top mortgage lenders to provide custom analytic solutions for their mortgage portfolios, in order to take preventative action and reduce the costly impact of strategic defaults.
The company provided the media with a preview of its soon-to-be-released mortgage performance report this week, covering data through the end of last month. The numbers show that while the nation’s volume of non-current home loans remains elevated, it’s been steadily declining for several months now. LPS reported that 6.92 million mortgages were delinquent or in the process of foreclosure at the end of November, and in October, it was just above 7 million.
Of the 6.87 million mortgages in the country that were behind on payments at the end of last year, 2,196,000 have been referred to an attorney for foreclosure, according to LPS’ analysis. Another 4,674,000 are 30 or more days delinquent but not yet in foreclosure, with 2,117,845 of these at least 90 days overdue.
LPS says the nation’s total mortgage delinquency rate – which includes loans at least a month past due but not yet pushed to a foreclosure attorney – stood at 8.83 percent as of December month-end. That’s down 2.1 percent from November, and 17.9 percent below the delinquency rate a year earlier.
LPS defines the foreclosure inventory rate as loans that have been referred to a foreclosure attorney but have not yet reached the final stage of foreclosure sale. That rate was 4.15 percent at the end of December. The foreclosure pre-sale inventory rate rose 1.7 percent from November and is up 9.3 percent year-over-year in LPS’ study.
The company’s data show the states with the highest percentage of non-current loans (defined as the total number of foreclosures and delinquencies as a percent of all active loans in that state) include: Florida, Nevada, Mississippi, Georgia, and New Jersey.
The lowest percentage of non-current loans can be found in: Montana, Wyoming, Arkansas, South Dakota, and North Dakota.
LPS’ mortgage performance results are derived from its loan-level database of nearly 40 million mortgages. The company plans to provide a more in-depth review of this data in its December Mortgage Monitor report, scheduled for release February 4.
The lawsuit was filed in the United States District Court for the Northern District of California. The case alleges that ASC induced borrowers to default on their mortgages by telling them they would not be eligible for a loan modification if they were current on payments. Harwood Feffer claims ASC induced borrowers to default on their mortgages in order to charge penalty and fees associated with the late payments.
“As a loan servicer, ASC generates a significant portion of its revenue from fees, penalties, and interest collected on the non-performing loans it services,” said Harwood Feffer in a statement. The statement continued, “Consequently, it is in ASC’s financial interest to avoid, delay, and deny loan modifications and to pursue foreclosures because doing so will lead to increased revenue.” According to the Home Affordable Modification Program guidelines, a borrower who has not defaulted but is distressed and believed to be facing imminent default may be eligible for a loan modification if financial hardship can be demonstrated.
“By making loan default a prerequisite for modification, without regard to whether a borrower otherwise qualified for a modification due to financial hardship, ASC caused borrowers to unnecessarily suffer ruined credit and subjected them to significant fees, penalties and interest,” alleged Harwood Feffer. A spokesperson for Wells Fargo said he could not comment specifically on the lawsuit as it is currently under review, but said, “We believe, as we have from the beginning of this crisis, that it is in our customers’ and the country’s best interests to assist customers who can afford their homes – with some help – to remain in them. And, it is our goal to exhaust all options before moving a home to foreclosure sale.”
"Bank of America and Fidelity National Financial have reached an agreement confirming that Fidelity will provide title insurance on the sale of foreclosed properties," said B of A spokesman Dan Frahm.
Under the agreement, Fidelity will defend the new homeowner in court if a foreclosed owner challenges the title. B of A will cover the costs and, if necessary, any damages awarded to the previous owner.
"Bank of America and Fidelity National are taking this step to facilitate the continued availability of title insurance that is vital to the marketability of foreclosed properties," Frahm said.
The giant bank is seeking similar agreements with other title insurers.
American Land Title Association chief executive Kurt Pfotenhauer welcomed the B of A/Fidelity agreement.
“Title insurers are looking to lenders to provide appropriate indemnities," he said. ALTA also has approached the GSE regulator about title indemnifications.
"We will continue to work with federal and state regulators, Fannie Mae, Freddie Mac and lenders to bring certainty to the marketplace," Pfotenhauer said.
One in every 29 Nevada homes received a foreclosure filing during the third quarter. Looking at total numbers of foreclosures, neighboring California was worst, with 191,016, followed by Florida, Arizona, Illinois and Michigan. Combined, the five states accounted for half of all foreclosures last quarter. Of course, once the moratorium ends, we can expect a new tidal wave of foreclosures. John McGeough, a broker, said that the current foreclosure freeze may give distressed homeowners extra time to do a short sale and avoid having their homes repossessed by the banks. "Foreclosure should be the last resort."
Copyright Loss Mitigation Institute LLC 2010.
All Rights Reserved.
The 30-year, fixed-rate mortgage hit its lowest point in more than 50 years. The Freddie Mac Primary Mortgage Market Survey reported the average rate for a 30-year, fixed-rate mortgage at 4.19% with an average 0.8 origination point for the week ending Oct. 14, down from last week's average of 4.27%. A year ago the average was 4.92%. This is the lowest rate the survey has recorded since its inception in 1971. Mortgage rates were last at this level in April 1951, according to Freddie Mac. The Bankrate survey of large banks and thrifts reported the average rate for a 30-year, fixed mortgage is 4.47% with a 0.32 origination point, slightly above the 25-year-old survey's record low of 4.45% posted last month. Rates for 15-year FRMs are falling steeply, setting a new low for Freddie Mac.
The GSE said the rate was down to 3.62% with an average origination point of 0.8. The rate for a 15-year FRM was 4.37% a year earlier. Bankrate said the average rate for 15-year, FRMs of 3.85% is a new record low and down from 3.87% a week earlier. Frank Nothaft, vice president and chief economist at Freddie Mac, attributed the declining rates to the loss of 95,000 nonfarm payroll jobs in September. The GSE said the average for a 5-year, adjustable-rate mortgage is 3.47% with an average 0.6 origination point, down from 4.38% a year ago. The average remained flat with last week. Bankrate reported the average rate for a 5-year, ARM fell last week to 3.62% from 3.64% previously. The one-year Treasury-indexed ARM averaged 3.43% with an average 0.7 point up slightly from 3.4%. At this time last year, the one-year ARM averaged 4.6%.
Copyright Loss Mitigation Institute LLC 2010.
All Rights Reserved.
The mortgage-foreclosure crisis spilled into the financial markets on Thursday, driving down bank stocks and weighing on mortgage bonds as investors took a grim view of the potential costs. Shares of U.S. banks fell, while the broader stock market was essentially flat. Bank of America Corp., potentially among the most affected, dropped more than 5%. Bank bonds also fell, and the cost of buying protection against a possible debt default by banks climbed. "The level of uncertainty in the economy is at extraordinarily high levels to begin with," said Jack Scott, chief investment officer at BlackHawk Capital Management, a Charlotte, N.C., money manager that owns mortgage securities. "The foreclosure problem adds another layer of acute uncertainty."
So far, the foreclosure crisis hasn't affected consumer mortgage rates, which remain near record lows. They are closely linked to rates on U.S. Treasurys, which have tumbled in recent months. Until recently, investors hadn't fled financial stocks. If the issues raised about foreclosure practices in recent days are easily resolved technical glitches, with most foreclosures resuming after brief delays, then the impact on most investors would be small. "The [mortgage] market seems to be functioning relatively well, but that could change depending on how we see this play out," said BlackRock Inc. portfolio manager John Vibert. But some fear that it may be difficult to do any foreclosures for a while.
The risk is that foreclosure flaws are so widespread, or the political furor so heated, that the entire process grinds to a halt, as Citigroup analyst Joshua Levin said in a conference call this week. In some cases, that would choke off much of the cash flow used to pay mortgage bondholders. Another concern is that banks could be forced to modify billions of dollars in loans, including reducing principal, which could leave bondholders as big losers. Banks, meanwhile, could be hit with investor lawsuits, and foreclosure delays could bring short-term losses. Some investors are pushing for banks to take back nonperforming mortgages in cases of faulty documentation.
Harry Smith spoke with economics correspondent Rebecca Jarvis about the government program designed to help struggling homeowners.
BofA serviced $2.1 trillion in mortgages in 2009 overall, a 5% increase from the year before. Of the other "big-four" lenders, only Wells had a yearly increase at 0.9%. Both Chase and Citi saw decreases. Simon said Bank of America is working through the backlog of its HAMP trials that are still awaiting action. "Progress has been made by Bank of America as we have focused on getting through the backlog of aged trial modifications over the past three months and completing actions on the ineligible mortgages will begin to show up in coming reports," Richard Simon, a spokesman for BoA said. "Until then, any conclusions seem premature." But HAMP may only be a microcosm of the issues in loss mitigation. Lender Processing Services’ Applied Analytics division reported in August that more than 2.6 million mortgage loans are 90+ days delinquent and not yet in foreclosure, the heart of the shadow inventory of homes waiting to hit a troubled market.