A new TransUnion report showed that consumers who only defaulted on their mortgage in the economic recession were far better risks versus those who went delinquent on multiple credit lines such as auto and credit card loans.
This finding was proven by all credit scoring ranges. According to TransUnion, the results demonstrated that consumers that had mortgage-only defaults performed better on new loans compared with those with multiple delinquencies.
The TransUnion study demonstrated that there was no strong evidence that supported the "excess liquidity theory," which suggests consumers who stopped paying their mortgage loans in the recent recession had more cash flow in the short term, and because of this, had the capacity to repay their other debts.
The study, according to TransUnion, actually found that consumers who are undergoing foreclosure performed similarly, if not better, on certain accounts when they opened them further in the process.
"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 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."
Added evidence that suggests the "excess liquidity theory" did not occur in the recession was seen when comparing consumers who were 120 days past due on their mortgages, but opened new auto loans at different times after their delinquency. The percentage of consumers delinquent on these auto loans dropped as more time passed.
"This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks. It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "Also, these results are well-aligned with our past research into the reversal of the payment hierarchy dynamic. 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 notable exception was experienced in credit card borrowers where a slight delinquency rise happened when borrowers delayed the opening of the new tradeline. The delinquency changes were slight 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 said.
"This study is critical in that it sheds more light on consumer behavior in a challenging economy," Becker said. "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. This study affords lenders greater insight into consumer performance, hopefully leading to a more mutually profitable, long-term relationship between lender and borrower."