A new TransUnion study reveals that consumers who received mortgage modifications outperformed those who did not on new consumer loans that were opened after their initial mortgage delinquency.

This improved performance occurred despite the fact that nearly 6 in 10 mortgage modifications went 60 or more days delinquent 18 months following the modification date.

According to TransUnion, the study re-affirmed that consumers who defaulted only on their mortgages are better risks than consumers with multiple delinquencies – even when controlling for credit score - as first published in TransUnion's Life After Foreclosure study last year.  

This study only looked at loan modifiers and non-modifiers, with comparable VantageScore credit scores, who had originally been 120 or more days past due (“DPD”) on their mortgage loans. It found the recidivism rate - the rate at which modified mortgages again went 60 or more DPD - was 41.9% 12 months after modification. After 18 months, that rate had risen to 59.1%.

“The purpose of this study was to learn how consumers performed on other loans opened following serious mortgage delinquency, and what impact mortgage mods might have on that performance. To do this, first we needed to determine the outcome of certain mortgage loan modification programs,” says Steve Chaouki, group vice president in TransUnion’s financial services business unit. “Our results found that about 4 in 10 consumers remained current on their mortgages 18 months after modification. More generally though, TransUnion found that consumers with a mortgage mod performed better on new loans originated after their initial mortgage default than those with no mods.

“In the 12 months after new loan origination, consumers with a mortgage mod had an average 18% lower delinquency rate on new credit cards than those with no modification, and a nearly 50% lower delinquency rate on new auto loans,” adds Chaouki.

Within the population of modified mortgages, certain sub-segments of borrowers performed relatively better following modification. In particular, the study compared borrowers who had previously gone delinquent only on their mortgages - but no other loans - to those borrowers who went delinquent on other loans as well as their mortgages. The 12-month recidivism rate for mortgage-only (MO) defaulters was 38.8%, while the recidivism rate for multiple delinquency (MD) borrowers was 46.2%.
“MO defaulters significantly outperformed MD defaulters on new loans opened after mods even when controlling for credit score,” says Charlie Wise, director of research and consulting in TransUnion’s financial services business unit. “After 12 months, MO defaulters had an average 45% lower delinquency rate on new auto loans opened following a mortgage mod, and an average 63% lower delinquency rate on new bankcards.”

Regional Impact

States that had the highest mortgage recidivism rates included: Delaware (67.5%), Rhode Island (66.3%), Maine (64.3%), Florida (64.2%), and Texas (64.2%). States with the lowest recidivism rates – and much lower than the national average of 59.1% – included Wyoming (46.3%), Montana (48.2%), the District of Columbia (50.0%), New Mexico (50.7%) and Michigan (53.2%).

Also of note is how states most impacted by the mortgage crisis performed. As TransUnion reported in its quarterly Credit Industry Trends announcements, Arizona, California, Florida and Nevada experienced the greatest increases in mortgage delinquencies during the latest recession.

For example, the 60-day mortgage delinquency rate (a precursor to foreclosure) increased 245% on a national level between Q1 2007 and Q4 2009 to the highest level recorded in the past 20 years. During that same timeframe, mortgage delinquencies spiked more than 600% in each of the aforementioned states.

Despite facing similar issues in the housing crisis, consumers in these markets performed quite differently in the loan modification study. For example, while Florida had the fourth highest 18-month recidivism rate, California (at 55.9%) had the ninth lowest in the nation. Arizona, at 63.1%, and Nevada, at 60.0%, were both above the national average.

“It was interesting to note that while mortgage delinquency recidivism exceeded the national average in some areas that were hardest hit by the mortgage crisis, such as Florida and Arizona, other hard-hit areas (like California) performed much better than the national average,” says Wise. “These differences are due to a number of factors, such as differences in borrower risk profiles, housing price indices and unemployment rates among these states.”

TransUnion’s mortgage loan modification study reviewed more than five million mortgage loans that were originated prior to 2008 and went 120 days or more past due between January 2008 and June 2010. Of those mortgage loans, approximately 559,000 records of mortgage modifications between January 2008 and July 2011 were identified.

Mortgage modifications were analyzed for 6-, 12- and 18-month performance. The analysis also looked at the performance of new loans opened after the initial mortgage default. It should be noted that because loan modification programs are relatively new, consumer performance could only be evaluated up to 18 months after the origination of their new loans.

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