Strategic Defaults Are Projected To Remain Issue

MINNEAPOLIS-A plurality of bank risk managers (46%) expect the volume of strategic defaults in 2012 to surpass 2011 levels, as more than 25% of U.S. homeowners owe more on their mortgages than their homes are worth, according to FICO.

FICO, a provider of analytics and decision management technology, announced additional results from its latest quarterly survey of bank risk professionals, finding 19% of bankers polled expected the number of strategic defaults in 2012 to match that of 2011.

"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."

Concerns about strategic defaults also were reflected in response to a question about the consumer payment hierarchy. When asked if the current generation of homeowners considers their mortgage to be their most important credit obligation, 49% of bankers said no. By comparison, 29% said yes.

Although concerns remain regarding strategic defaults, other signs point to growing stability in the housing market. More respondents (26%) expected delinquencies on mortgages to decline in the coming months than at any previous time in the two years FICO has been conducting this survey. Furthermore, 53% of respondents said the housing market would improve by the end of 2012, compared to 24% who said the market would deteriorate.

'Starting To Stabilize'

"Lenders seem to believe the housing market is starting to stabilize," said Jennings. "Defaults, whether strategic or not, continue to be problematic. However, a gradually improving job market could begin changing the dynamics in housing. If job creation continues, banks will be more likely to embrace mortgage lending once again."

A majority of survey respondents (56%) expected the supply of credit for residential mortgages to fall short of demand over the next six months. A similar majority (53%) expected the supply of credit for mortgage refinancing to fall short of demand, indicating lenders remain cautious about the risks in the real estate market.

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