Strategic Defaults to Plague Real Estate Market Throughout 2012
Press release from the issuing company
Wednesday, April 11th, 2012
FICO, the leading provider of analytics and decision management technology, today announced additional results from its latest quarterly survey of bank risk professionals, finding that a plurality of respondents (46 percent) expected the volume of strategic defaults in 2012 to surpass 2011 levels, as more than 25 percent of U.S. homeowners owe more on their mortgages than their homes are worth.
"After five years of a brutal housing market, many people now view their homes more objectively and with less sentimentality," said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. "Regardless of legal or ethical issues around strategic defaults, lenders must account for this risk when they evaluate mortgage applications in declining markets. Many homeowners who find themselves upside down on mortgages in the future are likely to consider strategic default as an acceptable exit strategy."
Concerns about strategic defaults were also reflected in response to a question about the consumer payment hierarchy. When asked if the current generation of homeowners considers their mortgage to be their most important credit obligation, 49 percent of bankers said no. By comparison, 29 percent said yes.
Signs of stability despite worries about strategic defaults
Although concerns remain regarding strategic defaults, other signs point to growing stability in the housing market. More respondents (26 percent) expected delinquencies on mortgages to decline in the coming months than at any previous time in the two years FICO has been conducting this survey. Furthermore, 53 percent of respondents said the housing market would improve by the end of 2012, compared to 24 percent who said the market would deteriorate.
"Lenders seem to believe the housing market is starting to stabilize," said Jennings. "Defaults, whether strategic or not, continue to be problematic. However, a gradually improving job market could begin changing the dynamics in housing. If job creation continues, banks will be more likely to embrace mortgage lending once again. A healthy job market is essential for improving the quality of mortgage applications and reducing default risk."
Credit gap expected to persist
A majority of survey respondents (56 percent) expected the supply of credit for residential mortgages to fall short of demand over the next six months. A similar majority (53 percent) expected the supply of credit for mortgage refinancing to fall short of demand, indicating that lenders remain cautious about the risks in the real estate market.