Mortgage defaults do not predict poor credit behavior: TransUnion
Troubled borrowers who default on their mortgages are less likely to develop long-term poor credit behavior, when compared to those who default on other kinds of loans, according to a new study from TransUnion.
Consumers who default on other bills and lines of credit, such as credit cards and auto loans, are more likely to miss payments in the future. The results are meant to be used by lenders to help determine which kind of borrower is better apt to handle more credit.
The report found borrowers who had mortgage-only defaults on their records performed far better when they took out new loans when compared to borrowers who defaulted on multiple lines of credit.
For example, when assessing data on new auto loans, mortgage-only defaulters had a 5.8% 60-plus day delinquency rate, while those that had multiple delinquencies on credit cards and other loans had a 13.1% delinquency rate.
TransUnion said these statistics are fighting against the ongoing stereotype that mortgage-only defaulters benefited from the 'excess liquidity theory' in that a failure to pay their mortgage led to the borrowers having more money to cover other credit. The credit reporting agency said the reverse appears to be true, and the mortgage defaults have more to do with economic conditions, suggesting that these are borrowers with strong credit and potential to stay current on loans.
When it came to new credit cards, mortgage-only delinquent borrowers had an 11.4% default rate, while those with multiple delinquencies had a 27.1% 60-plus day default rate.
"This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks," according to Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt. 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."
TransUnion reviewed data from a random sample of 5 million consumers and ended up weeding its sample down to 129,000 new accounts that had the data points needed to make comparisons between the two borrowing subsets.
Earlier this week, a new report sponsored by the National Bureau of Economic Research showed homeowners at least two-months delinquent on their mortgage may be more apt to strategically default if offered a mortgage modification despite the damage to their credit.
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