$20 billion problem facing mortgage industry calls for immediate action
FICO (NYSE: FICO) announced today that it has predictive analytics engagements with four of the country’s top 10 mortgage servicers to identify borrowers at the greatest risk of strategic default.
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. University of Chicago Booth School of Business studies indicate that roughly 35 percent of mortgage defaults are strategic, and FICO estimates this makes strategic defaults more than a $20 billion problem annually. 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 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 ratios of 120 or higher, making them twice as likely to consider defaulting on 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, vice president of scores and analytics at FICO. “Fortunately, the technology exists to reverse the trend toward strategic defaults. Our goal is to help the industry implement that technology as quickly as possible.”
“Recent economic turbulence has made it critical for the already-depressed mortgage industry to develop more sophisticated account management strategies,” said Craig Focardi, senior research director at TowerGroup, a Corporate Executive Board company. “Preventing strategic defaults through the use of analytics is especially worth looking into, because this technology has the ability to help lenders make sense of strategic default, identify borrowers who are most at risk and minimize related losses.”
Additional information on FICO’s strategic default research can be found in the white paper “Predicting Strategic Default,” 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 3,500 lenders.
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™.
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Statement Concerning Forward-Looking Information
Except for historical information contained herein, the statements contained in this news release that relate to FICO or its business are forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including the success of the Company’s Decision Management strategy and reengineering plan, the maintenance of its existing relationships and ability to create new relationships with customers and key alliance partners, its ability to continue to develop new and enhanced products and services, its ability to recruit and retain key technical and managerial personnel, competition, regulatory changes applicable to the use of consumer credit and other data, the failure to realize the anticipated benefits of any acquisitions, continuing material adverse developments in global economic conditions, and other risks described from time to time in FICO’s SEC reports, including its Annual Report on Form 10-K for the year ended September 30, 2010 and its last quarterly report on Form 10-Q for the period ended June 30, 2011. If any of these risks or uncertainties materializes, FICO’s results could differ materially from its expectations. FICO disclaims any intent or obligation to update these forward-looking statements.
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