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Consumers in the super-prime and prime credit score categories are 50% more likely to engage in "strategic default" than those with lower credit scores, a recent study suggests. Strategic defaulters are borrowers who default on their mortgages because the value of their home has declined well below their mortgage balance.
Furthermore, there are a segment of borrowers that closely mimics strategic defaulters called "cash-flow managers" that would be favorable candidates for loan modification, according to findings by Experian, a Costa Mesa, Calif.-based information service provider, and Oliver Wyman Group, New York-based consultancy. Unlike strategic defaulters, these borrowers continue to make occasional payments on their mortgage, indicating their intention to get out of delinquency.
"While 60% of strategic defaulters are charged-off within six months after serious delinquency, one-third of cash-flow managers cure on their mortgage within six months after serious delinquency and another third remain less than 90 days past due," Piyush Tantia, a partner in the retail and business banking practice of Oliver Wyman, said in a news release.
"Therefore, cash-flow managers represent the borrowers who would make the best candidates for loan modification offers. The impact to businesses that successfully identify and address the two segments can be significant," Tantia said.
Experian and Oliver Wyman also state in their Q2 2009 Market Intelligence Reports that lenders continue to manage their risk exposure by aggressively reducing credit lines on revolving loans such as bankcards. Over the last 12 months, bankcard credit lines have declined from $3.8 trillion to $3.1 trillion, a 17% decline.
Looking at the economic climate as a whole, several loan products experienced a leveling off of early- and mid-stage delinquency rates in the second quarter, which seems to be a seasonal trend driven by tax refunds in April and May, according to the report.
However, the report notes that roll rates to late-stage delinquencies and charge-offs continue to be high. In such areas as California and Florida, where real-estate troubles have had a negative impact on other products, delinquency rates remain highly elevated over the national average across all of these products.
