Strategic Default Here to Stay Despite Improvements, Risk Managers Say

With reports that around 20 percent of mortgages are underwater, about 46 percent of bank risk professionals surveyed by FICO expect to see the volume of strategic defaults in 2012 exceed 2011 levels.

“After five years of a brutal housing market, many people now view their homes more objectively and with less sentimentality,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “Regardless of legal or ethical issues around strategic defaults, lenders must account for this risk when they evaluate mortgage applications in declining markets. Many homeowners who find themselves upside down on mortgages in the future are likely to consider strategic default as an acceptable exit strategy.”

Combined with concerns over strategic default are disconcerting results about consumer priorities. Only 29 percent of bankers said the current generation of homeowners considers their mortgage to be their most important credit obligation, while 49 percent said its not a priority.

Even with this discouraging data, 53 percent of survey respondents expect to see the housing market improve by the end of 2012, compared to 24 percent who said the market would deteriorate.

Also, 64.8 percent of respondents think mortgage delinquencies will decrease or stay the same, an 11.3 percent increase from the previous quarter.

“If job creation continues, banks will be more likely to embrace mortgage lending once again. A healthy job market is essential for improving the quality of mortgage applications and reducing default risk,” said Jennings.

Most respondents, 56 percent, expect demand for residential mortgage credit to exceed supply over the next six months. A similar majority, 53 percent, project demand for the supply of credit for mortgage refinancing surpass supply.

The survey included responses from 263 risk managers at banks throughout the U.S. in February 2012 and was a joint effort between FICO, provider of analytics and decision management technology, and the Professional Risk Managers’ International Association, a nonprofit that works to define and implement the best practices of risk management through education.

By: Esther Cho