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Survey shows banks expect strategic defaults to increase in 2012

st-louis-realtor-dennis-norman-strategic-defaultFICO, a provider of analytics and decision management technology to the banking industry, today announced results from its latest quarterly survey of bank risk professionals which showed that almost half (46 percent) expect the volume of strategic defaults in 2012 to surpass 2011 levels as a result of 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.”

Real estate market showing stability in spite of strategic defaults concerns

Twenty six percent of the respondents to the survey said they expected mortgage delinquencies to decline in the coming months and 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.”

Other highlights of the survey:

  • 56 percent expected the supply of credit for residential mortgages to fall short of demand over the next six months
  • 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.