Market analysts have finally figured out how to do what mortgage servicers had deemed impossible: They have begun to pinpoint defaulting borrowers who strategically walked away from their houses, as opposed to those who were forced out in foreclosure proceedings. Is it too soon to declare that this changes everything?
A new study by Experian and Oliver Wyman found that around 588,000 borrowers chose to walk away from their homes in 2008, calculating that they’d be better off ceding to a foreclosure than struggling to make mortgage payments. The study, described in a Los Angeles Times story Sunday, identified specific characteristics of these “sophisticated” defaulters. Why don’t servicers apply them to their delinquent loan data to determine which borrowers to offer loan modifications?
“Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they've fallen behind on other accounts,” the LAT describes as a finding of the study. Also, “Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006.”
Those are just two of multiple factoids the study produced on the profile of a sophisticated defaulter. Information like this could be put to good use.
It’s not unreasonable to think that mortgage servicers could analyze the profiles of their delinquent borrowers to pick out characteristics like these and use them to decide whether individual borrowers really do deserve loan mods. Servicers worried about investor lawsuits and the “moral hazard” of offering too many loan mods could assuage their fears by adopting a procedure like this. The great unknowns they have long cited in their obstinacy on the loan mod issue would vanish. Instead there would be clarity—and justice.