Strategic default is the phenomenon whereby borrowers who have the capacity to make their mortgage payments choose instead to default, often because the property value is less than the mortgage’s outstanding principal.

Lenders have traditionally used the degree of home price depreciation as a basis for predicting strategic defaults; however, FICO Labs research indicates that borrowers whose houses have lost the most value are only about twice as likely to default as those whose houses have lost the least value. Through the use of custom analytic models, FICO Labs researchers have demonstrated the ability to identify borrowers who are over 100 times more likely to default strategically than others. FICO is consulting with top mortgage lenders to provide custom analytic solutions for their mortgage portfolios, allowing them to take preventative action and reduce the costly impact of strategic defaults.

The agreement between FICO, CI and Collateral Analytics follows extensive testing of the Collateral Analytics automated valuation models (AVM) that incorporate additional data and market analytics from CI, all of which help support the FICO® Strategic Default Custom Analytic. Collateral Intelligence and Collateral Analytics will provide continued valuation and forecasting AVM analytics to support the FICO analytic offering.

During testing, FICO researchers found that, as a group, strategic defaulters tend to be more savvy managers of their credit than the general population, with higher FICO® Scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This indicates that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments.

“We are pleased to have Collateral Intelligence and Collateral Analytics actively engaged with FICO in providing our clients with analytic insight into this new consumer behavior and supporting the ongoing research and validation of our predictive models,” said Joanne Gaskin, FICO senior director, scores and analytics.
“This is an exciting opportunity for Collateral Intelligence,” said CI CEO Mark Sennott. “This is another example of how the use of better local data is changing the way mortgage lenders identify collateral risk.”

“FICO is an innovator and we are proud to have our CA Value AVM be part of this important new product,” said Dr. Mike Sklarz, CEO of Collateral Analytics.
Experts say continued weakness in the mortgage sector is driving greater numbers of strategic defaults. A recent study from the University of Chicago Booth School of Business indicates that 35 percent of mortgage defaults were strategic, which was up from 26 percent from the prior year reviewed.

The FICO Labs team built the strategic default analytic to rank-order both current and delinquent borrowers by their likelihood of strategically defaulting on their mortgage. The custom models achieved excellent separation of borrowers into high versus low strategic default risk bands.

Additional details about the FICO Labs research findings have been published in the white paper, “Predicting Strategic Default,” which is available for free at www.fico.com/Insights.

About the FICO® Score
With over 10 billion FICO® Scores used worldwide to empower lenders to make credit decisions, the FICO® Score has become the standard measure of credit risk worldwide. FICO® Scores are used today in more than 20 countries on five continents, as well as all of the top 50 U.S. financial institutions and both the 25 largest U.S. credit card issuers and auto lenders. The latest FICO® Score version, the FICO® 8 Score, has already been adopted by more than 7,500 lenders.

About FICO
FICO (NYSE:FICO) delivers superior predictive analytics solutions that drive smarter decisions. The company’s groundbreaking use of mathematics to predict consumer behavior has transformed entire industries and revolutionized the way risk is managed and products are marketed. FICO’s innovative solutions include the FICO® Score — the standard measure of consumer credit risk in the United States — along with industry-leading solutions for managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks, as well as leading insurers, retailers, pharmaceutical companies and government agencies, rely on FICO solutions to accelerate growth, control risk, boost profits and meet regulatory and competitive demands. FICO also helps millions of individuals manage their personal credit health through www.myFICO.com. Learn more at www.fico.com. FICO: Make every decision count™.
For FICO news and media resources, visit www.fico.com/news.

About Collateral Intelligence
Collateral Intelligence provides the top mortgage companies and government agencies with risk management tools that bring valuation science to assessing the quality of appraisals, broker price opinions and portfolio reviews. From single property reconciliations to million-unit pools of mortgages, CI offers both “deep dive” and automated collateral risk solutions.
For media or other information email CI at info@co-intel.com or visit our website at www.co-intel.com

About Collateral Analytics
Collateral Analytics (CA) develops real estate analytic products and tools to support financial institutions, institutional and retail investors, as well as property capital market activities.
As technological innovation fundamentally changes the structure of the real estate industry, CA empowers our partners, investors and clients with greater and faster access to information and the tools they need to make more informed property investment decisions. Contact www.collateralanalytics.com