Life After Foreclosure

Mortgage-only defaulters aren’t as risky as you’d think, a TransUnion study says.

May 25, 2011
/ PRINT / ShareShare / Text Size +

Consumers who defaulted only on their mortgages during the recession are far better credit risks on new loans than those who fell behind on multiple credit accounts, such as credit cards and auto loans, according to a study by TransUnion.

This was true across all credit score ranges.

The 60-day delinquency rate for new auto loans among consumers with a mortgage-only delinquency was 5.8% vs. 13.1% for borrowers with multiple delinquencies.

The same held true for holders of new credit cards: 11.4% vs. 27.1%.

The study found no strong evidence supporting the “excess liquidity theory,” which suggests consumers who stopped paying their mortgages during the recession had an increased cash flow in the short-term, and therefore could repay other debts.

DelinquencyIn fact, consumers in the foreclosure process performed similarly, if not better, on certain accounts when they opened them further in the foreclosure process.

“There appears to be a pocket of opportunity among mortgage-only defaulters that’s not the result of excess liquidity, but rather the unique circumstances of the recent recession,” notes Steve Chaouki, group vice president in TransUnion’s financial services business unit. “This new market segment that the recession created is an important one for lenders to understand. They have the potential today to be stronger and more reliable customers.”

"This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks,” adds 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,” he continues. “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.”

A noteworthy exception was seen in credit cards where a slight increase in delinquencies occurred when consumers delayed the opening of the new tradeline. The delinquency changes were minimal between accounts opened seven to 11 months later (18.5%) and 12 or more months later (18.7%).

“While we do not discount these results, we do not consider them conclusive given the remainder of the findings,” Chaouki says.

This study sheds light on consumer behavior in a challenging economy, Becker says.

“The analysis of consumer preferences between products and how they manage and prioritize them is important information lenders need to leverage to effectively manage their customer relationships,” he says. “This study affords lenders greater insight into consumer performance, hopefully leading to a more mutually profitable, long-term relationship between lender and borrower.”

Post a comment to this story


What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive