Home Loan Defaulters Okay Credit Risk

Tristan Powys (Credit Manager) @ Lucid Living

Borrowers who defaulted on their home loan during the recent recession turned out to be better credit risk than those who defaulted on several other types of loans.

Those who had only home loan delinquencies on their credit reports were more likely to stay current on new loans than those who had fallen behind on multiple smaller accounts, such as motor vehicle loans and credit cards. That’s according to the credit bureau TransUnion (US), which released the results of the new study this month.

In fact, borrowers with a home loan delinquency were only half as likely to fall 60 days behind on a new motor vehicle loan or credit card as borrowers with multiple smaller delinquencies, according to the credit bureau. The difference was found to apply across the full range of credit scores.

“This recession was unique in that certain consumers who defaulted on home loans would otherwise be good credit risks,” said Ezra Becker, a TransUnion credit bureau research executive. “It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt.”

It had been suggested that home loan defaulters might be in a better position to take on new debt than defaulters on lesser loans due to the additional funds freed up by not making a home loan payment every month. However, the study did not find much support for this “excess liquidity theory,” as it was called.

“There appears to be a pocket of opportunity among home loan-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,” said Steve Chaouki, a TransUnion credit bureau financial services executive. “This new market segment that the recession created…have the potential, today, to be stronger and more reliable customers.”

The study was based on a random sample of consumers who went at least 120 days past due on a between January 2008 and June 2009, then subsequently opened a new credit line.