An Oct. 31 study by Moody’s recently pinpointed homeowners with jumbo loans as a greater default risk than any other type of borrowers, including even risky subprime mortgages. Basing its claims on an analysis of of the nation’s mortgage-backed bond portfolios, Moody’s states that jumbo loans are especially preponderant in high-cost markets, and because of the major home value depreciation in recent years, many of those homeowners are stuck with negative equity – and many are resorting to “strategic defaults” to counter the ill-effects of owning such homes.
In response to this trend – 12 million mortgages are now underwater, and 30 percent of defaults are strategic – the Fair Isaac Corp., the company that develops the widespread FICO credit score, is creating a new kind of score to spotlight strategic defaulters before they abandon their properties, according to a Daily Herald report.
Joanne M. Gaskin, FICO’s predictive analysis director, said the new rating was created with the consumer in mind.
“We’re trying to understand (the situation) from the consumer’s perspective,” Gaskin said. “How much have I lost on the value of my home? What is the velocity of change” — that is, how fast have I lost market value, and is my situation getting worse? How long will it take to recapture what I’ve lost? …“Most consumers have a pretty good idea of what the market is doing” in their local neighborhoods.”
The new score has been immediately embraced, although, as with other FICO scores, its origins are shrouded in mystery. Four of the nation’s 10 largest lenders, the Herald reports, are using the score, utilizing its findings to contact high-risk borrowers and offer financial solutions before they strategically default on the property. And though FICO is tight-lipped on the score’s factors, it has admitted that credit scores, payment performance on debts, low revolving credit balances and the overall period of homeownership are factored in to its mathematical models.
Regardless of its composition, though, the Herald article makes it clear that quite a few banks may be using the new score as housing prices fall further and further.
“Ultimately, strategic default for many owners boils down to a calculation: Are the costs, financial and otherwise, worth the relief from an albatross house and mortgage?” Ken Harney, the article’s writer, asks. “If the Moody’s study is accurate, thousands of jumbo borrowers are struggling with that very calculation right now, and a lot of them are likely to bail.”