Mortgage Defaulters: Do We Have It Wrong?

Convention wisdom–those who go bad on a mortgage are a poor risk for the future. Credit card lates are not so bad. This study from TransUnion may say that we have our industry guidelines wrong…

A new TransUnion study revealed that consumers who only defaulted on their mortgage during the economic recession were far better risks than those consumers who went delinquent on multiple credit accounts, e.g. credit cards and auto loans. This was evident across all credit scoring ranges. The results showed that consumers with home loan-only defaults performed better on new loans than those with multiple delinquencies. The study did not find any strong evidence supporting the widely accepted “excess liquidity theory,” which suggests consumers who stopped paying their home loansloans during the recent recession had an increased cash flow in the short term, and therefore could repay other debts. In fact, consumers in the foreclosure process performed similarly, if not better, on certain accounts when they opened them further in the foreclosure process.

“There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit. “This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.” Additional evidence suggesting the “excess liquidity theory” was not in effect during the recession was witnessed when comparing consumers who were 120 days past due on their home loans, but opened new auto loans at various times after their delinquency. The percentage of consumers delinquent on those auto loans decreased as more time passed.

“This recession was unique in that certain consumers who defaulted on home loans 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.” Source: TransUnion


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