Strategic Defaults Remain High, But Relief In Sight

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COSTA MESA, Calif.-Strategic defaulters, who are defined as remaining delinquent for six months after the initial date of delinquency, continued as a high percentage of all mortgage delinquencies at 19% in the second quarter of 2009, according to updated findings from Experian and Oliver Wyman.

The report said there is reason to believe the phenomenon may have peaked, or be close to peaking.

The defining characteristics of strategic defaulters include:

• Higher origination mortgage balance-Customers with higher mortgage origination balances are more likely to be strategic defaulters; this is true even after controlling for geography, number of first mortgages and VantageScore.

• Counterintuitive home-equity line default behavior-Strategic defaulters who also have home-equity lines are more likely to stay current on those lines prior to mortgage default. The report found 50% of strategic defaulters who went delinquent on their home-equity line of credit did so before they went delinquent on their mortgage, compared to 70% for the overall population.

Data from the first half of 2009 may contain the first signs of a "break in the clouds." The report shows the absolute number of strategic defaults for the first half of the year, 355,000, as well as first-time mortgage delinquencies in general, declined in successive quarters in 2009, suggesting they may have peaked in Q4 2008.

"In Q2 2009 we see the first evidence of a break in the upward trend," said Peter Carroll, partner at Oliver Wyman.

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