‘Savvy managers of credit’ walking away from loans

FICO, the Minneapolis-based company that generates consumer credit scores, reported that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments.

According to the FICO website, 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.

Strategic defaults occur when borrowers who have the capacity to make their mortgage payments choose instead to default, often because the property value is less than the mortgage’s outstanding principal.

“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 FICO and head of FICO Labs.

Through the use of custom analytic models, FICO Labs researchers say they can identify borrowers who are over 100 times more likely to default strategically than others.

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.