Owe 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.
FICO 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.
This 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?
Okay, 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.