Think you know your neighbors? FICO Labs, a unit of the Fair Isaac Corp., is implementing a new technology that will measure the likelihood of a homeowner walking away from their mortgage
, even when they can afford the payments.
The concept is known as strategic default, and it has been difficult to predict in the past. But according to the latest research, the typical strategic defaulter is a far savvier borrower than previously imagined.
As more homeowners find themselves saddled with underwater mortgages
– cases in which the home is worth less than the debt -- the prospect of simply walking away has broadened for many Americans.
But make no mistake – no matter which risk profile you fall into, defaulting on your home loan will have a lasting impact on your financial future.
In the past, lenders have traditionally looked at the degree of a home's value
depreciation to identify heightened risk for strategic default. But FICO Labs research now shows that borrowers
whose homes have lost the most value are only twice as likely to default as those who have lost the least value.
In fact, strategic defaulters were generally found to have higher credit scores
, lower revolving balances and fewer instances of going over credit
card limits. These findings show a stark difference in consumer behavior from distressed homeowners who miss payments.
As AOL Real Estate previously reported
, there has even been a recent spate of celebrities walking away
from their mortgages.
The reality remains, however, that the ramifications of strategic default can haunt a homebuyer for years to come.
"Walking away is a very serious matter," says Glamis Haro, a lending manager at Union Settlement, a credit
union in New York City. "Just one late report [on your mortgage] can seriously damage you."
In the past, Haro says, a 30-day late payment on a home loan could result in 30 to 40 points being deducted from your credit score
. But in today's unforgiving credit market, one late payment can now result in up to 100 points being deducted. And lest homeowners think they can take the heat, a late payment stays on the record for 7 long years.
After 120 days of no payment, the delinquent homeowner enters what Haro calls "five fives" status – the notation (5-5-5-5-5) made on a borrower's credit report when they've gone beyond the point of no return. "You're considered unbankable," she says. It could take years of working with a financial adviser to get back into lenders' good graces, she adds.
And while there are some experts who claim that walking away is actually beneficial
in the long run for struggling homebuyers, the risks often outnumber the benefits. A public record, such as a bank judgment or collections account, will affect a borrower's credit for 10 years from the last date of payment -- and any judgment is enforceable for up to 20 years, Haro says.
The best option, she says, is to seek a mortgage modification. And while she admits that the federal government's Home Affordable Modification Program (HAMP) can take much longer than borrowers may anticipate, the alternative is credit suicide.
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