Major Servicers Turn to FICO to Combat Strategic Defaults

""FICO"":http://www.fico.com announced this week that it has inked deals with four of the country's top 10 mortgage servicers to provide them with its predictive analytics technology to identify borrowers who pose the greatest risk of strategic default.

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The Minneapolis-based company says strategic default, the phenomenon whereby borrowers with the capacity to make their mortgage payments choose instead to default, has become an urgent and costly problem for lenders.

Studies conducted by the University of Chicago Booth School of Business indicate that roughly 35 percent of mortgage defaults are strategic, and FICO estimates this makes strategic defaults more than a $20 billion problem annually.

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This problem is expected to persist for the foreseeable future, as newly issued ""first notices of default"" jumped 33 percent in August 2011 and a recent FICO survey of risk managers predicted ongoing weakness in the housing market until 2020.

FICO Labs researchers ""announced earlier this year"":http://dsnews.comarticles/fico-profiles-strategic-defaulter-2011-04-22 that they had developed a method for predicting which borrowers are at greatest risk of strategic default, focusing especially on the six million U.S. homeowners with current-loan-to-value (LTV) ratios of 120 or higher. FICO says LTVs above the 120 threshold making them twice as likely to consider walking away from their mortgage.

FICO's strategic default prediction algorithms are now being employed by four of the 10 largest U.S. mortgage servicers. FICO estimates the collective benefit of its solution for these servicers could reach $2 billion in the first year.

""Distressed borrowers are increasingly likely to see strategic default as a viable or necessary option, but such decisions are devastating to not just their own credit profiles but also lenders' portfolios and the economy as a whole,"" said Greg Pelling, VP of scores and analytics at FICO.

""Fortunately, the technology exists to reverse the trend toward strategic defaults,"" Pelling added. ""Our goal is to help the industry implement that technology as quickly as possible.""