Mortgage-Only Defaulters Not Bad Credit Risks

May 24, 2011 No Comments »

good news

It turns out defaulting on the mortgage isn’t as bad as some made it out, per a study from credit bureau TransUnion.

The company noted that mortgage-only defaulters, those who stay current on other lines of credit while letting the mortgage slip away, perform better on new loans versus those with multiple delinquencies.

In other words, those who are late on all types of loans continue to exhibit high rates of delinquency, whereas those who only skip their mortgage payments tend to keep other bills in check.

For example:

60+ days delinquency levels on a new auto loan:
– 5.8 percent — mortgage-only delinquency
– 13.1 percent — multiple delinquencies

60+ days delinquency levels on a new credit card:
– 11.4 percent — mortgage-only delinquency
– 27.1 percent — multiple delinquencies

So basically those who were late on everything from credit cards to auto loans and leases continue to make missteps, while those who simply can’t handle their mortgages stay on top of other bills.

Perhaps these were the folks who thought they could afford a house during the peak years, while relying on interest-only home loans, option arms, and other payment-deferring home loan programs.

The study also debunked, or at least did not find strong support for, the “excess liquidity theory,” which suggests consumers who stopped paying their mortgage have increased cash flow to use for other debts.

“This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit, in a release.

“It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt.”

Good luck trying to explain this to their subsequent mortgage lender or loan underwriter

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