Consumers with high credit scores are more likely to default on mortgages than credit-card loans, said FICO, maker of the scoring formula most widely used by lenders.
In 2009, consumers with FICO scores from 760 to 789 defaulted on real estate loans at a rate 200 percent greater than credit-card loans, or 0.3 percent of consumers compared with 0.1 percent, the Minneapolis-based company said in a statement recently. FICO considers borrowers who are more than 90 days delinquent to be in serious delinquency or default.
“This used to be a problem for subprime,” said Mark Greene, chief executive officer of FICO, in an interview in New York. “Now we’re starting to see at the high end of the marketplace, people with good FICO scores, having serious delinquency problems.”
Mortgages have historically been the first debt obligation consumers repay, Greene said in the interview. There’s been a change in the “payment hierarchy” and consumers with higher credit scores may be late with mortgage payments on second homes, which are viewed as investment properties, he said. Late mortgage payments by high-scoring consumers will persist for another six months to nine months, said Greene.
Homeowners also may be strategically defaulting, which is when they choose to stop making payments on homes that are usually valued at less than what they owe, according to Greene, 55, who joined Minneapolis-based FICO in February 2007. Strategic defaults rose 128 percent to 588,000 in 2008, according to Experian Plc, a Dublin-based credit-checking company, and Oliver Wyman, a N.Y.-based consulting firm.
FICO analyzed data of more than 9 million consumers and 12.3 percent, or 1.1 million consumers, had scores from 760 to 789, said Craig Watts, a spokesman for the company. About 20 million U.S. consumers have FICO scores in that range, Watts said.
Home loans more than 90 days overdue -- the point at which lenders usually begin the process of seizing a property -- climbed to 5.09 percent in the fourth quarter compared with 4.38 percent the previous quarter, according to a report released Feb. 19 by the Washington-based Mortgage Bankers Association.
Scores based on models established by FICO, formerly known as Fair Isaac Corp., are used to gauge a consumer’s financial health. The numbers, which range from 300 to 850, affect the ability to get mortgages, credit cards and insurance products, as well as the rates borrowers pay for them.
The FICO score is used by 90 percent of the 100 largest banks. Mortgage lenders use the scores, which rank borrowers according to the likelihood of default in the next 24 months, in more than 75 percent of all residential mortgage originations, according to FICO.
A score of at least 750, as well as steady income and a 20 percent down payment, is generally needed for the best mortgage rates, said Adam Levin, chairman and co-founder of San Francisco-based Credit.com.
The company’s fiscal first-quarter profit rose 46 percent to $17.7 million, or 37 cents a share, as a decline in revenue slowed, FICO said Jan. 27.