Post-Foreclosure: Study Finds Mortgage-Only Defaulters Pose Less Risk

Consumers who only defaulted on their mortgage during the economic recession pose far less of a risk than consumers who went delinquent on multiple credit accounts, according to a new study from ""TransUnion"":http://www.transunion.com.

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The Chicago-based credit bureau says the results showed that consumers with mortgage-only defaults performed better on new loans than those with multiple delinquencies, such as credit cards and auto loans, and this was evident across all credit scoring ranges.

For example, TransUnion found that 11 percent of new credit card holders who had previously defaulted on their mortgage but not on any other debt obligations subsequently fell behind on their new credit card payments, versus 27 percent who had defaulted on multiple debt accounts.

""This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks,"" said Ezra Becker, VP 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.""

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Becker added, ""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.""

Based on its latest analysis, the credit bureau also concluded that most people who became delinquent on their mortgage do not have a surplus of funds built up.

TransUnion says its study did not find any strong evidence supporting the widely accepted ""excess liquidity theory,"" which suggests consumers who stopped paying their mortgage loans during the recent recession had an increased cash flow in the short term, and therefore could repay other debts.

""There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,"" said Steve Chaouki, group VP 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.""

Additional evidence suggesting the ""excess liquidity theory"" was not in effect during the recession was found by TransUnion when comparing consumers who were 120 days past due on their mortgages, but opened new auto loans at various times after their delinquency. The percentage of consumers delinquent on those auto loans decreased as more time passed.

Becker says TransUnion’s study sheds more light on consumer behavior in a challenging economy.

""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 said.