Fair Isaac Corp. said this week that the trend of consumers' defaulting on mortgages while continuing to pay their credit cards has spread to the most creditworthy borrowers.
Last year, 0.3% of people with FICO scores from 760 to 789 defaulted on real estate loans, compared with 0.1% who defaulted on credit cards, reports Fair Isaac, which uses the brand name FICO. FICO considers borrowers who are more than 90 days delinquent to be in serious delinquency or default.
Mortgages historically have been the first debt obligation people repay. But since at least 2007, data from the credit bureaus has indicated that subprime borrowers have become more likely to be late in paying mortgages than credit cards.
Homeowners also may be strategically defaulting — that is, choosing to stop making payments on homes whose market value has slipped beneath the amount they still owe, according to Mark Greene, chief executive at Fair Isaac.
That hard choice is occurring often enough that an old phrase resurfaced to describe it, one last heard circa the early 1990s during the savings-and-loan crisis and ensuing real estate mess. “Jingle mail.”
In the economic downturn, this became a new and disturbing twist for lenders in a housing market reeling from the failure of the subprime mortgage market, freewheeling credit decisions and rampant investor speculation that sent home prices soaring.
Collection industry insiders have closely watched strategic defaults for nearly two years, according to Collections & Credit Risk.
For the latest report, Fair Isaac analyzed data of more than 9 million consumers, and 12.3% had scores from 760 to 789. An estimated 20 million U.S. consumers have FICO scores in that range. FICO scores rank borrowers according to their likelihood of defaulting in the next 24 months. They range from 300 to 850. The scores are used by 90% of the 100 largest U.S. banks. Mortgage lenders use the scores in more than 75% of all residential loan originations, according to FICO.
