NEW YORK (MainStreet) – For the average consumer, defaulting is the last thing you want to do. However, a study released Thursday has analyzed the profile of the average defaulting homeowner and found that the most credit-savvy homeowners are the ones choosing to walk away from their mortgages rather than paying it when they can.
The action, known as a strategic default, happens when homeowners stop making payments on their mortgages because the payments will amount to more than the house is worth.
Analysts at FICO, the company responsible for our current credit score model, say that most homeowners who choose to default, or go underwater, are not only capable of making their mortgage payments but are smart credit-handlers in other areas of their life.
This demographic tends to have higher FICO scores than the general population, in addition to lower revolving balances. Also, these homeowners rarely exceed their credit card limits or use their credit card for retail purchases, the study finds.
Another study conducted last year by the University of Chicago also found that people at the higher ring of society, with multi-million dollar homes, often opt for strategic defaults. The University found that the number of home foreclosures that resulted from a strategic default was 31%, while the National Bureau of Economic Research released a report at around the same time that gave an optimistic estimate of the situation, placing the number of strategic defaults at 25%.
In FICO’s report, the company also found that if a lender targeted just 20% of its riskiest borrowers, it would be able to prevent about two-thirds of future strategic defaults.
The findings of the FICO report reveal a stark predicament for lenders who often use the depreciating home values as a basis for predicting strategic defaults. So the study prompts lenders and investors to readjust the bar of lending.