June 3, 2011 (Chris Moore)
Are borrowers who only defaulted on their mortgage loans during the economic downturn a better credit risk than borrowers who defaulted on their mortgage loans and their other debt, such as car loans and credit cards? A recent study by credit bureau giant TransUnion would suggest that they are.
Using a random sample of consumers who had met the following criteria:
An open mortgage loan on or before January 2008, who had one non-mortgage debt open on or before December 2007, incurred a 120+ delinquency on their mortgage loan between January 2008 and June 2009, and subsequently incurred at least one additional debt after the mortgage became delinquent;
TransUnion found that consumers with mortgage-only defaults did in fact perform better on new loans than those who had multiple delinquencies. Their conclusion was based on two factors; delinquency rates on new auto loans and delinquency rates on new credit cards that were obtained after the borrowers mortgages went 120+ days delinquent.
Here’s what they found:
Percentage of mortgage defaulters who went 60+ days late on new auto loans:
• 5.8 percent for borrowers with mortgage-only delinquencies
• 13.1 percent for borrowers with multiple delinquencies
Percentage of mortgage defaulters who went 60+ days late on new credit cards:
• 11.4 percent for borrowers with mortgage-only delinquencies
• 27.1 percent for borrowers with multiple delinquencies
The study for the most part disproved the theory that consumers who stopped paying their mortgages then had more cash flow that could be used to pay off their other debts. Also known as the “excess liquidity theory,” the study also found that during the recession, the delinquency rate of auto loans obtained after the borrower went 120 days past due on their mortgage, decreased as more time passed.
60+ days delinquent levels of new auto loans after borrowers mortgage reached 120 day delinquency:
• Opened within six months — 10.4 percent delinquent
• Opened within seven to 11 months — 9.7 percent delinquent
• Opened 12 or more months later — 9.3 percent delinquent
“This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks. It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “Also, these results are well-aligned with our past research into the reversal of the payment hierarchy dynamic. Bottom line — consumers prioritize their payments based on product preference when they find themselves constrained financially. In that sense, loan defaults have always been strategic.”
When (and if) the economy improves, the credit records of millions of Americans will have been damaged by the economic downturn. Those who found themselves defaulting on their mortgages only might find lenders to be a bit more friendly than those who “let it all go.”
Read the report in its entirety on TransUnion’s website.
Tags: TransUnion, mortgage defaults, mortgage loans, economic downturn, new auto loans, credit cards, excess liquidity theory, 120 day+ delinquency