"All Things Edmonds" Blog

You've been paying your mortgage faithfully every month - even as your home's value has plummeted quicker than Charlie Sheen's image. You watch as your neighbors walk away from their mortgages and you wonder why you shouldn't do the same.  The Standard & Poor's/Case-Shiller 20-city index shows price declines in 19 cities from January to February. The index fell for the seventh straight month. Prices fell at a faster rate in 11 markets in February compared with the previous month. Have you ever thought you were so under water with your home that you might just simply walk away?

More and more, people with even stellar credit ratings are making the strategic decision to walk away from their homes (one study says that last September alone, 35% of mortgage defaults were strategic). In what industry experts are calling "strategic walkaways," homebuyers with excellent credit are simply walking away from their mortgages.  And this is more than a rarity. It has been a multi-billion issue for lenders nationwide.

The Fair Isaac Company that developed the FICO scoring has developed a proprietary tool that they claim allows them to identify these traditionally low-risk borrowers who might decide to abruptly walk away from their mortgages. According to FICO, they can identify two-thirds of stretegic defaulters who otherwise would be undetectable. In a sense, they are identifying ticking time bombs.... borrowers who are paying their monthly mortgages on time and then suddenly stop, simply walking away from their homes.

FICO is using this new tool to pre-identify strategic defaulters so that lenders can intervene before borrowers walk away. FICO calls this intervention "pre-delinquent treatments" and they include such things as warning borrowers of the consequences of not paying their mortgage (lower credit scores, inability to get loans, etc).

While the details of how they determine who might be a strategic defaulter remain a secret, some indicators that they track are:

• How long the borrower has owned the house.  The shorter the time, the higher the risk.
• Variations in recent credit usage history. Are they opening new accounts, maxing out credit lines, etc?
• Regional statistics on how much home values have declined.

So, if you have a high credit rating and receive a call from your lender, don't be surprised if it's not to thank you for  your loyal business. They may just be firing a shot over your bough.

Casey