Study: Jumbos most likely to default
WASHINGTON — According to new research, prime jumbo borrowers, who once were thought to be among the safest bets, are now 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. That's because an exceptionally high number of jumbo owners 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.
Jumbo loans are those that exceed the conventional limits of Fannie Mae and Freddie Mac. Nationally, that ceiling is $417,000, but in high-cost areas between 2008 and Oct. 1 of this year, conventional limits ranged as high as $729,750. The maximum in those high-cost areas is now $625,500.
Meanwhile, Fair Isaac Corp., developer of the ubiquitous FICO credit score, says strategic defaults — where owners who can afford to keep paying their loans but see no economic rationale for doing so — continue to be a "growing problem." More than an estimated 12 million mortgages are now underwater, and 30 percent of all defaults on loans are strategic, according to Joanne M. Gaskin, FICO's predictive analysis director.
Fair Isaac recently created a new type of score designed solely to spot potential strategic defaulters before they hand back the house keys. At least four of the top 10 largest lenders and servicers are using it, contacting high-risk borrowers, offering financial solutions plus information about the costs associated with strategic walkaways. The company claims its score can spot the riskiest homeowners, some of whom show telltale characteristics that make them as much as 110 times more likely to walk away than the least-risky borrowers.
What homeowners often don't know, however, are the penalties they face for walking away. These include triple-digit drops in their credit scores — which will hamper their ability to rent a house or obtain credit for years — plus the possibility that lenders will find a way to seek recovery of whatever they owe after foreclosure proceedings. About a dozen states restrict "deficiency" recoveries. But in most states, lenders are free to pursue whatever assets they can locate.
Ultimately, strategic default for many owners boils down to a calculation: Are the costs, financial and otherwise, worth the relief from an albatross house and mortgage? If the Moody's study is accurate, thousands of jumbo borrowers are struggling with that very calculation right now, and a lot of them are likely to bail.
Kenneth R. Harney can be reached at firstname.lastname@example.org.