Mortgage Modifications Improve Loan Performance

Consumers with mortgage modifications outperform those without on new loans.

October 5, 2012

Consumers who received mortgage modifications outperformed those who didn’t on new consumer loans opened after their initial mortgage delinquency, according to TransUnion.

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

The study further re-affirmed that consumers who defaulted only on their mortgages are better risks than consumers with multiple delinquencies—even when controlling for credit score, according to TransUnion’s “Life After Foreclosure” study.

This study looked only at loan modifiers and nonmodifiers with comparable VantageScore® credit scores who had originally been 120 or more days past due on their mortgages.

It found the recidivism rate (the rate at which modified mortgages again went 60 or more days past due) 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 modifications might have on that performance, explains Steve Chaouki, group vice president in TransUnion’s financial services business unit.

“To do this, first we needed to determine the outcome of certain mortgage loan modification programs,” he says. “Our results found that about four 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 modification 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, Chaouki adds.

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 defaulters was 38.8%, while the recidivism rate for multiple delinquency borrowers was 46.2%.

“Mortgage-only defaulters significantly outperformed multiple delinquency defaulters on new loans opened after modifications even when controlling for credit score,” says Charlie Wise, director of research and consulting in TransUnion’s financial services business unit.

After 12 months, mortgage-only defaulters had an average 45% lower delinquency rate on new auto loans opened following a mortgage modification and an average 63% lower delinquency rate on new bankcards, Wise says.

Regional impact
States with the highest mortgage recidivism rates include 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%—include Wyoming (46.3%), Montana (48.2%), the District of Columbia (50%), New Mexico (50.7%), and Michigan (53.2%).

Also of note is how states most affected by the mortgage crisis performed. Arizona, California, Florida, and Nevada experienced the greatest increases in mortgage delinquencies during the latest recession.

Despite facing similar issues in the housing crisis, consumers in these markets performed quite differently in the loan modification study. For instance, 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%, 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, other hard-hit areas like California performed much better than the national average,” Wise says. “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.”