FICO: Americans More Likely to Default on Mortgages than Credit Cards

American consumers are now defaulting on their mortgages in even greater numbers than they are walking away from credit card debt.  According to FICO's® Score Trends Service, this is a phenomenon that is historically unique.

FICO said the mortgage default risk for consumers with high FICO scores now exceeds their credit card default risk, even though most credit cards are unsecured credit and mortgages are secured by real estate.  There is a parallel rise in mortgage delinquencies for these high scoring consumers.

The company said that their analysis of trends in FICO scoring shows that recent repayment behavior has shifted significantly from what has historically been expected.  In 2005 bankcard accounts were more than 3 times more likely to become seriously delinquent, that is 90+ days late, than were mortgages.  During the period 2008 to 2009 that number slipped to 1.6 times as likely.  Borrowers at the high end of FICO's scoring range of 300-850 were even more likely to become seriously delinquent.  In 2009, 0.3 percent of consumers with 760-789 FICO scores defaulted on real estate loans; only 0.1 percent defaulted on bankcards.  

 "We're identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before," said Dr. Mark Greene, CEO of FICO. "Economic instability is creating unknown risk in lenders' credit portfolios as well as counter-intuitive trends in consumer behavior. While the FICO 8 score continues to prove its unprecedented power in rank-ordering consumers for risk, even low-risk consumers are changing the value they give different credit lines."  Dr. Green made his statement in late February and noted that the upcoming implementation of the CARD Act would likely create "additional, unhelpful pressures on the banking business."

The company found that lenders had tightened their lending criteria in 2008-2009 and began "cherry picking" their new borrowers.  As a result mortgages granted between April and October last year used significantly higher standards that those granted earlier.  In 2005, borrowers with FICO scores below 700 constituted 46 percent of new mortgage customers but by last year that number had dropped to 25 percent.  In the bankcard sector, 51 percent of new customers had scores under 700 in 2005, 38 percent had scores in that range in 2008.

The most dramatic shift in the mortgage/bankcard ratio occurred in the Pacific region where bankcards are now only 1.3 times more likely to be defaulted than mortgages, down from 6.4 times more likely in 2005.  In the Midwest where the smallest change occurred the ratio slipped from 2.5 times to 1.5.