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Mortgage modification savings help create better borrowers

(7/11/12) - Mortgage modifications fail at an alarmingly high rate, but borrowers with mortgage modification fare much better on other types of consumer loans, compared to those who don't get mortgage modifications.

Sixty percent of mortgage modifications fail 18 months after the modification, but if the default is their only credit ding, they are still better credit risks than consumers with multiple delinquencies.

It may have something to do with the estimated average monthly mortgage payment savings of about $500 Home Affordable Modification Program (HAMP) borrowers get when they modify. Even if they slip on the larger mortgage payment, they still have extra money to pay the smaller credit bills.

While the default rate is troublesome, if mortgage modifications create more creditworthy consumers, that's a plus for both homeowners and the economic juice they provide.

TransUnion examined borrowers with loan modifications (loan modifiers) and those without (non-modifiers), with comparable TransUnion VantageScore credit scores, who had originally been 120 or more days past due (DPD) on their mortgage loans.

"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," said Steve Chaouki, group vice president in TransUnion's financial services business unit.

New loan performance - loan modiers vs non-modifiers

TransUnion examined loan modifiers who went 60 or more DPD on new loans within 12 months after the modification and non-modifiers who likewise went 60 or more DPD within 12 months of a loan origination.

"In the 12 months after new loan origination, consumers with a modifications had an average 18 percent lower delinquency rate on new credit cards than those without a modification and a nearly 50 percent lower delinquency rate on new auto loans," Chaouki added.

On credit cards, 13.63 percent of loan modifiers went 60 or more DPD, compared to 11.4 percent of non-modifiers. On auto loans, 6.06 percent of loan modifiers went 60 or more DPD, compared to 11.4 percent for non-modifiers, TransUnion found.

The study also 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 (the rate at which modified mortgages again went 60 or more DPD) for mortgage-only (MO) defaulters was 38.8 percent, while the recidivism rate for multiple delinquency (MD) borrowers was 46.2 percent.

New loan performance after major mortgage delinquency - MO defaulters vs. MD defaulters

TransUnion also compared the percentage of MO defaulters who became 120 or more days delinquent on new lines of credit with MD defaulters who became 120 or more days delinquent on new lines of credit.

"MO defaulters significantly outperformed MD defaulters on new loans opened after mods even when controlling for credit score," said Charlie Wise, director of research and consulting in TransUnion's financial services business unit.

"After 12 months, MO defaulters had an average 45 percent lower delinquency rate on new auto loans opened following a mortgage mod, and an average 63 lower delinquency rate on new bankcards," Wise said.

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