Credit unions servicing a significant number of mortgages mightbenefit from a new tool to help determine which mortgage holderswere at the highest risk for choosing to default, FICO said.

Strategic defaults have become a significant problem formortgage servicers and holders and particularly for FICO, parent ofthe FICO credit score. Research has shown that the borrowers mostlikely to walk away from their mortgage loans tend to be otherwisesterling examples of good credit and money managementpractices.

The company found that strategic defaulters tend to be moresavvy managers of their credit than the general population, withhigher FICO scores, lower revolving balances, fewer instances ofexceeding limits on their credit cards and lower retail credit cardusage.

Lenders have traditionally used the degree of home pricedepreciation as a basis for predicting strategic defaults; however,new FICO Labs research indicated that borrowers whose houses havelost the most value are only twice as likely to default as thosewhose houses have lost the least value.

“Through the use of custom analytic models, FICO Labsresearchers have demonstrated the ability to identify borrowers whoare over 100 times more likely to default strategically thanothers,” FICO said.

“Before mortgage servicers can work effectively with potentialstrategic defaulters, they must first be able to identify them,”said Andrew Jennings, chief analytics officer at FICO and head ofFICO Labs. “Our new research shows it is possible for servicers tofind those at greatest risk of strategic default, both to preventlosses and to prevent borrowers from making a decision that willdamage their credit future.”

Credit union members have not been as eager to strategicallydefault on their mortgage loans because credit unions are morewilling to work with the borrower to resolve the situation,according to industry sources, but the phenomenon has hit someCUs.

FICO has already introduced the product with the largestnational mortgage servicing firms.

Jennings shed some light on the research FICO has done in thearea.

“There appears to be a correlation between people who might haveonly been at an address for a couple of years and their willingnessto walk away,” Jennings said, adding that people who are lookingseriously at walking away from a mortgage often take steps toincrease their supply of available credit before they do it.

FICO is rolling the new product out to servicers first becauseservicers are its natural target market, he explained. “This is aproduct for after the loan is booked,” Jennings said, “not as muchas part of the underwriting process.”

Consumers at risk for walking away from mortgage commitmentshave been harder to identify since, as a whole, they usually havebetter than average credit patterns.

And what should servicers do once they have identified aborrower with a high potential to default? A FICO white paperentitled “Predicting Strategic Defaults” suggested, “Because thoseat risk of strategic default often have high credit scores and carevery much about maintaining that status, pre-delinquentcommunications should also emphasize negative ramifications.” Iturged servicers to remind borrowers how much more expensive anddifficult it might be to have a dramatically lower credit scoreafter a default. And then there are the potential legal costs.

“Servicers should also make sure borrowers know they will useall available means to collect the debt,” FICO wrote in the whitepaper. “Sometimes, borrowers are misled by the casual discussion ofstrategic default in media and blogs on the Internet. It'simportant for servicers to make the policies and intentionsclear.”