TransUnion, one of the three credit bureaus, conducted a study to determine the impact mortgage modifications had on other loans consumers opened after the modification. Those who received mortgage modifications outperformed those who did not, on new consumer loans opened after the first mortgage delinquency. Based on this study, consumers who defaulted only on mortgages were better risks than those who had multiple delinquencies.
What is a loan modification? It is a change to the loan agreement with the bank to make your payments more affordable. This is preferable, if you are not able to pay your mortgage, to a foreclosure or short sale.
This TransUnion study reviewed more than five million mortgage loans that were opened prior to 2008 and became 120 days or more past due between January 2008 and June 2010. Of these loans, approximately 559,000 were mortgage modifications that occurred between January 2008 and July 2011. Mortgage modifications were analyzed for 6-, 12- and 18-month performance. Since this program is new, only up to 18 months of performance could be evaluated on TransUnion’s database.
The analysis looked at performance of new loans opened after the first mortgage default. This study was further refined to review only loan modifiers and non-modifiers with comparable VantageScore credit scores who were originally 120 days late or more on their mortgage loans. VantageScores are credit scores developed by the three credit bureaus.
Twelve months after the modification, 42 percent of those with modified mortgages went 60 days or more past due; and 59 percent did so after 18 months.
Twelve months after opening a new loan, consumers with loan modifications had an 18 percent lower delinquency rate on new credit cards than those with no modifications. They had a 50 percent lower delinquency rate on auto loans.
39 percent of those who had previously gone delinquent “only on their mortgages” went 60 days past due on their modification loan 12 months after modification, compared to 46 percent of those with multiple delinquencies including their mortgage.
“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.”
States that had the highest mortgage recidivism rates (the rate at which modified mortgages again went 60 days or past due) were: Delaware (67.5%), Rhode Island (66.3%), Maine (64.3%), Florida (64.2%), and Texas (64.2%).
States with the lowest recidivism rates and below the national average of 59.1% were: Wyoming (46.3%), Montana (48.2%), the District of Columbia (50.0%), New Mexico (50.7%) and Michigan (53.2%).
Those with modified mortgages were a better risk, than those who didn’t have a modified mortgage and also defaulted on their mortgage. The modification did help somewhat. They were more current on other new loans, but 60 percent became 60 days or more delinquent in 12 months on their mortgages. Mortgage payments still have taken a back seat to car loans, since the car is needed to get to work or to find employment.