November 19, 2011

FICO Now Predicting Mortgage Walkaway Likelihood

imageOwe more than your house is worth?  Is your credit otherwise good?  Do you have few credit cards but pay them on time?

Congrats.  You’re a likely candidate for strategic default, according to FICO (formerly Fair, Isaac), the company synonymous with credit scoring.  And now Moody’s took a look at the mortgage market and said the most likely homeloaner to default is sitting on an upside down jumbo mortgage.  Why?  Because the subprime mortgages already shook out the people who couldn’t pay, the prime market has some risk of strategic default, but the Jumbo pool lost the highest quality mortgages due to refinancing.  Most mortgages left didn’t refinance because they couldn’t.  And this is spooking the PrimeX, the index fund of prime RMBS (Residential Mortgage Backed Securities).

Given how Special it is here with our high prices, we have plenty of Jumbos both in the Real Bay Area and outside it.  That means Walking Away all around the Bay.

Jumbo mortgages may be next in line to default

By Kenneth R. Harney, Washington Post, Published: November 11

Do you have a big mortgage and good credit scores but not much equity — maybe you’re even underwater? Do you see little chance that your home’s market value will improve much during the coming three to seven years?

If you answered yes to both questions — and thousands of homeowners across the country could do so — new research suggests that you are in a category that lenders need to worry about most: prime jumbo borrowers who once were thought to be among the safest bets but who now are the most likely to opt for a strategic default and walk away from their homes.

In a study released Oct. 31, the ratings agency Moody’s said that based on its analysis of mortgage-backed bond portfolios, homeowners with jumbos now constitute “greater strategic default risk” than any other type of borrowers, including subprime. That’s because an exceptionally high number of jumbo owners — many in high-cost markets hit by real estate deflation over the past several years — are stuck with persistent negative equity. More than half of the jumbos analyzed by Moody’s where owners are still making payments have home market values lower than their outstanding loan balances.

Whoa.  More than half the current jumbos are on upside down homes?  Good thing that doesn’t happen in the RBA!  Instead, we concentrate the upside down jumbos in subprime territory: Vallejo, Oakland, Antioch, Concord, Salinas, Fremont, Hayward, East Palo Alto and Redwood City!  And South San Francisco and Daly City and most of San Jose and half of Sunnyvale and three-quarters of Santa Clara and San Mateo, but it’s not like you should be worried, I am sure your house  is just fine!  And if it isn’t, let’s find out what FICO is doing to predict your behavior so you can stay a few steps ahead of them.

imageFICO says 67% of strategic defaulters are within the bottom quintile of nondelinquent mortgage holders, and 76% within the bottom 30% of late payers, ranked according to their model.  Obviously they’re not going to give away their Secret Formula of Doom, but they admit defaulters have high FICO scores.  That’s right, the more likely their other model says you’re a great credit risk, the more likely you are to be a terrible mortgage risk to the innocent dupes at the hapless bank.  Although this isn’t exactly rocket science here: why would someone default on their mortgage for nonstrategic reasons if they have a FICO of 845?  A high score means excellent ability to pay, so this chart really says among mortgage deadbeats, the better your credit, the more likely you’re playing the bank instead of vice versa.  I think Occupy Wall Street has been telling us the same thing for a couple of months now.

Here are the other “red flags” FICO admits to using in creating their new predictive model:

  • Lower utilization, as shown in the chart below. We also saw less overlimits on credit cards, reflecting better credit management behavior.

imageThis means, duh, people with high credit scores don’t use more credit than they need, which is, duh, why they have high credit scores in the first place (see above).  This also means that Joanne Gaskin, who developed this model, doesn’t understand the difference between less and fewer

(Free grammar clue: Use fewer for quantifiable amounts and less for amorphous abstracts.  Example: FICO has fewer exogenous variables in this model than the blog entry suggests, as utilization is directly linked to FICO score.  That makes their claims of this Predictive Deadbeat Model’s awesomeness less believable.)

  • Less retail balance—chances are that they spend money carefully.

Does spending less than the typical But I Want It Now consumer contribute to a higher or a lower credit score?  I’ll give you three guesses here.  (This is also an exception to the fewer vs. less rule. Time, money, and distance, while countable, use the term less because they still have abstract tendencies as opposed to, say, the 14.6 million underwater houses in this country.)

  • Shorter length of residence in the property—and thus, likely less attachment to that property.

The real estate market peaking between 2005-2008 (depending on where the house is) should have absolutely nothing to do with this brilliant insight (which only coincidentally has a high correlation with an individual’s Loan to Value ratio).

  • More open credit in the past six months—perhaps in anticipation of damaging their credit?

imageOkay, this one makes complete sense.  If you’re going to Walk Away on purpose, you might as well be ready for it by piling up on credit, because it’s going to dry up as soon as the first NOD hits.  Renting an alternate place to live before pulling the trigger is another thing to look for. 

If I were coming up with a model for strategic defaulters, I’d just look at the advice on the Walk Away discussion boards and see how many can be quantified via credit reporting tools. Opened new lines of credit in the last six months? You’re giving FICO too much lead time. Better open them in the last week if you’re going to walk.


Comments (33) -- Posted by: madhaus @ 5:14 am

33 Responses to “FICO Now Predicting Mortgage Walkaway Likelihood”

  1. CB Says:

    From the FICO link, their research-

    …enables servicers to act sooner, to prevent losses and help customers avoid making a decision that will damage their credit standing.

    If this is the prevailing thought, then those on the lending side have their heads firmly planted in the sand.

    Underwater jumbo/prime customers don’t need help understanding the impact on their credit score. They are Nobel Laureates the impact on FICO, taxes, legal, etc. That’s why they’re so likely to do it.

    Why banking industry analysts should be working on is finding ways to encourage well-off empowered customers to give a shit about credit scores when a couple hundred thousand dollars are at stake.

  2. SEA Says:

    #1- It’s really no surprise to me that when people complain about an extra 25 cents for a gallon of gas that these same people suggest that their FICO score might not be the most important thing in the world.

    A more technical calculation might be to compute NPV with the FICO score being the variable. Basically compute NPV with a high interest rate [low FICO], and then compute the NPV with a lower interest rate [high FICO].

    You know the routine, “I just purchased a $750k home, so now I cannot afford an extra $20 for gasoline. But I’m sure it’s cheaper than renting, even if I could have afforded the gasoline as a renter.”

    —————-

    “Free grammar clue: Use fewer for quantifiable amounts and less for amorphous abstracts.”

    Generally use fewer with discrete items; use less with quantifiable continuous items.

    Yesterday I drove to the store and purchased 10 items. Today I drove to the store at a greater average rate of speed, so it took less time, but I purchased fewer items. I can quantify exactly how much less time it took, but time is continuous.

    “Instead, we concentrate the upside down jumbos in subprime territory: Vallejo, Oakland, Antioch, Concord, Salinas, Fremont, Hayward, East Palo Alto and Redwood City!”

    It’s difficult to understand why anyone would need a jumbo loan outside of the RBA. Who paid that much, yet not in the RBA? Amazing.

  3. nomadic Says:

    Well done, madhaus. Very nice write-up! Too bad weekend articles are almost like “throwaways” on here.

    What’s the point of identifying potential strategic defaulters now? Are the banks going to consider reducing loan balances? I don’t think so. This train is chugging along the tracks and there’s little to be done to change course now.

  4. Divasm Says:

    I actually like the weekend posts a lot more because they are more informative and thought-provoking. But as such, they are much harder for me to reply to with an off-the-cuff snarky (yet hopefully amusing) comment, especially in my current state of sleep deprivation.

    So keep ‘em coming, and don’t worry if all you get is a thumbs up sometimes. The grammar lesson on this one alone was worth the “like” button click.

  5. Nicholas Carroll Says:

    FICO was a bit behind the curve when they announced this “scientific” profile in April 2011, since realtors had marked the pattern by 2009 (I wrote how FICO was actually disseminating the idea of strategic default as a good option in http://www.huffingtonpost.com/nicholas-carroll/ficos-new-strategic-defau_b_855295.html)

    And at this point, it usually is a good option on an underwater home — for self, for family, and community. This is because it keeps the mortgage money in the local economy, rather than flowing into big bank vaults from where it will never return, in the form of either jobs or local investment.

  6. madhaus Says:

    Sometimes the weekend posts are strictly throwaway, and sometimes I try to do some think pieces like the above. That’s the excitement of the weekend, you just never know what’s coming up next. Why, tomorrow might even be some look at an FB who foreclosed on a bank, but it’s more likely a zippy list of codes.

    Nicholas Carroll, that’s a good article but it looks like you intended to follow up on that FICO white paper and haven’t yet. Please let us know when you do.

  7. The Gilroy Alex Says:

    How about something about that monstrosity they’ve turned “downtown” Slummyvale into, that’s got to have had a horrible effect on house prices around there.

  8. ms Says:

    SEA,
    Emerald Lake/Farm Hills = technically RWC and not RBA
    Burlingame/San Mateo west of El Camino, technically not RBA.
    Millbrae, not RBA…
    but all of these will net you a jumbo loan…

  9. SEA Says:

    Is buying outside the RBA ever worth a jumbo loan?

  10. ms Says:

    The real RBA isn’t worth getting a jumbo for.
    And if you need a jumbo, you can’t afford RBA, just “sort of” and “nuh uh.”

  11. SEA Says:

    Ok, I stand corrected:

    It’s relatively easy to understand that there are those who could not buy certain non-RBA properties without a jumbo loan, but it’s difficult to understand why any person in this category purchased using a jumbo loan.

  12. madhaus Says:

    No, it’s incredibly simple why such people bought in marginal neighborhoods using jumbos.

    80/20 lending meant every house required a jumbo and everyone who wanted one would qualify. And the Realtards kept reminding them to buy now or be priced out forever.

  13. ms Says:

    SEA, I don’t understand how someone puts down $200K-$350K and then jumbos the rest, all to live in “sort of” or “not really.”
    It happens a lot in places like Millbrae. Big D was beyond right on Millbrae, by the way.

  14. nomadic Says:

    I don’t understand how someone puts down $200K-$350K and then jumbos the rest, all to live in “sort of” or “not really.”

    What does that mean? Put $200k down on your million dollar pile so that the kids can go to Cupertino schools. $800k mortgage. Big deal. Any two-income tech industry couple can handle that, right? Especially when interest rates are below 5%.

  15. ms Says:

    You can’t get jumbos now without putting down 20 percent of the total.
    So houses like Big D’s Millbrae one go for 900K, with the buyer bringing $250K, and the federal government on hook for the rest.
    FICOs’ Smart-Enough-to-Walk 2012 will hesitate since it’s their $250K.

  16. madhaus Says:

    Yeah but think back to 80/20 lending; 80% first (jumbo) and 20% second mortgage, meaning no skin in the game whatsoever. Then everyone is just shocked, shocked that the FBs would even consider defaulting on a loan tied to an asset that dropped 40, 50, 60%.

    As to why people would borrow $729K plus $200-300K to buy a place in The Corridor of Not Quite, that’s a mix of Realtard Kool-aid and coming to terms with what they can’t have. Look, very few of us can buy wherever we want. Most of us have a price range and an absolute ceiling, and for many, the shrinking RBA is beyond it. So the next step is next-to-RBA or Former RBA in 2006, places like Millbrae. Then again, everything all the way to Seattle was in the RBA in 2006.

  17. SEA Says:

    #12- Real simple for you to understand, maybe. But I still find it difficult to understand those who complained about 25 cents extra per gallon for gasoline, yet purchased with a jumbo loan. The only guess I have is that they thought ‘the housing price appreciation would take care of everything.’ But that is only true in the RBA, so maybe we had non-RBA buyers thinking that they were RBA material? Wishful thinking. I guess I can understand that.

    I can almost hear them now, “Sure I cannot afford gasoline today, but after a few years of paying all these high interest payments on my mortgage, I’ll be profiting hundreds of thousands.”

    Similarly speaking, I’m not sure why so many struggle with the basic concept of a diverging limit: If the housing price appreciation is always greater than inflation, then in the long run the only thing that has any value is housing, RBA notwithstanding. Did anyone really think this to be true, as if there would never, ever be any adjustment in how people value housing?

    Like a Cosmic Santa, I find it difficult to believe that people actually thought that was a good long-run assumption, yet at the same time I remember a particular regular who chanted these things. Did he really believe it to be so?

    And, as you point out in #16, people who couldn’t afford $10 extra for 40 gallons of gas were purchasing million dollar homes with essentially zero down. Who actually thought that could go on and on forever?

  18. SEA Says:

    #15 “FICOs’ Smart-Enough-to-Walk 2012 will hesitate since it’s their $250K.”

    Owner came here over 18 months ago chanting what a great deal his property was, yet it never sold.

    And there have been many others owners who suggest their property is worth much more. I’ve heard it many different ways, but it’s all basically the same, “I will never sell for $X, because I paid more than that.”

    It does not matter how much you paid yesterday, that’s a sunk cost, and the government should have cut its losses on Solyndra sooner rather than later.

    I have a friend who nearly went bankrupt betting on the scrap metal market back in 2007/2008. He holds a scrap license, and he was buying at what he suggested were “low prices” and was holding the scrap to later sell at “much higher prices.” Basically he claimed the price of scrap was going to go even higher, so why sell at today’s low prices. When the scrap market went down, well, let’s just say he took hundreds of thousands of dollars in losses. Hoping prices will return often results in larger losses.

  19. ms Says:

    SEA,
    Plenty of people purchased with maybe not $1M zero down, but over $650K zero down.
    The banks were stupid. They were stupid. I went up to another San Mateo special today.
    Around 2009, they started defaulting. Around 2010, they got smart and put some renters in the house they were going to lose. Renters are paying less than par for San Mateo.
    As of today, this it’s a short sale that never will close, plus $2,000 in loanowner pocket monthly until 04/30/2012. (Loanowner took out in 2004.)
    It’s hard to feel sorry for anyone in this situation.

  20. ms Says:

    SEA, your friend needed a commodity put. Why was he messing around like this without one?
    It’s just rhetorical.
    I personally witnessed a bunch of potential loanowners walking into a short that won’t close, dependent on a realtard that didn’t know the difference between concrete slab and perimeter.
    These potential loanowners don’t even know they need to get at least one realtard out of the equation.
    They probably don’t know what shadow inventory is either.

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  22. PKamp3 Says:

    I saw an article where an anonymous writer to a mailbag was discussing taking out a mortgage on a second house and defaulting on the first… that would fit your last point perfectly. Buy second house, mail keys in on the first, suck it up for seven years? Sound very doable considering prices have been down for ~5 years now.

    Most of the comments against the plan were of the ‘morals’ variety. YMMV.

    LNKD lock-up period ends tomorrow! Mint those new millionaires to bail out the jumbo-loan owners!

  23. SEA Says:

    Some people are able to explain human behavior, such as Björk.

  24. ms Says:

    PKamp,
    The “morals” issue is of conflict.
    You see liar-loan (dial 866-whatever) mortgages with 2004-07 origination. You see that someone signed dox stipulating that they’d never pay <7 percent of Libor, never ever, until 2030, in that 7th grade, big-letters, Seventeen Magazine-style handwriting.
    You feel sorry for them.
    Then again, zero down, up to $200K HELOC'd, missed payments for 36-60 months on all of it, getting rent on top of that, whining that people should go Occupy on your behalf, and then they do.
    That 72-year-old in Redwood that Occupiers were squawking about? She had tax delinquencies, there are multiple DOTs, and dollars-to-donuts she owned property way before the county database came online.
    Yeah, she was 94063

  25. ms Says:

    PKamp (#21):
    Is this the anonymous article?

    http://forums.redfin.com/t5/Bay-Area/Considering-Strategic-Default-How-Long-Can-I-Stay/td-p/184264

    This situation, and all the others like it, are just the lenders’ fault and the loanowners’ fault. These parties are the only ones coming out ahead. Everyone else bailed them out.

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