A homeowner’s station in life and personal spending beliefs and habits are important indicators of a borrower’s potential for home-mortgage default, according to researchers at the University of Alabama at Birmingham (UAB) School of Business.
Even though the research concerns mortgages, insurance underwriters might be interested.
While the mortgage industry has traditionally focused on income, credit scores or loan-to-home-value ratios to determine default risks, this research suggests that if lenders looked at the behavioral characteristics of borrowers they would get very different default probabilities.
“Our research has shown that a borrower’s personal traits and behaviors have considerable influence on their willingness and ability to repay a mortgage loan and avoid foreclosure,” says Stephanie Rauterkus, Ph.D., UAB assistant professor of finance.
The study, Behavioral Determinants of Mortgage Default, was authored by Rauterkus, her husband Andreas Rauterkus, Ph.D., UAB assistant professor of finance, and Grant Thrall, Ph.D., professor of geography at the University of Florida.
The researchers looked at 7,000 mortgages and found that affluent, well-educated and older borrowers 55 years and up were significantly less likely to experience a mortgage default, while married borrowers in their 30s with multiple children who earn between $40,000 and $80,000, and live in older, more established neighbors located near city centers are more likely to default.
Broken down by what they call LifeMode classification, those in the groups High Society, Upscale Avenues, Senior Styles, Solo Acts, Scholars and Patriots and American Quilt were less likely to default. Those in the Metropolis, Family Portrait, High Hopes, Global Roots, Factory and Farm and Traditional Living groups were more likely to default.
In a further analysis, the team found cases in which extremely divergent default levels were reported between similar lifestyle groups. In one example, two groups with complementary income levels and other similarities in traditional default-pressure categories experienced dramatically different default patterns.
“This tells us that lifestyle is a more important determinant in the calculation of the probability of mortgage failure than is income,” Andreas Rauterkus says. “Someone may have the income to pay off their mortgage, but if other lifestyle attitudes or views are considered, a borrower simply may choose to stop paying the mortgage in certain circumstances.”
“Neighborhoods matter,” Stephanie Rauterkus says. “Neighborhoods typically are made up of residents in similar life stages with similar lifestyle outlooks that make certain neighborhoods more susceptible to default trends than others.”
Asked by Insurance Journal if the research has application in insurance underwriting of autos and homes that can also turn on credit scores, Stephanie Rauterkus said, “Absolutely!”
Default risk is a function not only of a borrower’s credit profile but also their lifestyle profile. Rauterkus argues that just as lifestyles should be taken into consideration when underwriting mortgages, they could also be considered in insurance underwriting.
“Borrowers and insureds are more than just a credit profile. We believe that there are several explanations for why consumers make decisions and these explanations are not always rational,” she says.
It’s always worth remembering that customers are more than just a credit profile.
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