Home Loan Modifications Cut Credit Risk, TransUnion Says

Delinquent U.S. homeowners who received a loan modification have a better record of repaying auto and credit-card debt than troubled borrowers who received no mortgage help, TransUnion Corp. said.

Homeowners whose payments were reduced had a 6.1 percent delinquency rate on auto loans compared with an 11 percent rate for borrowers who didn’t get a mortgage modification, according to a study by the Chicago-based credit-rating company. The delinquency rate on credit-card payments was 14 percent for homeowners with a modification, compared with 17 percent for those who didn’t get assistance.

The difference shows how modifications, while failing to prevent a majority of seriously delinquent borrowers from defaulting again, can help consumers become better risks for other lenders, said Charlie Wise, TransUnion’s director of research and consulting.

“Very clearly, it’s a driver of improved performance,” Wise said during an interview in Beverly Hills, California. “This is what allows you to turn the credit spigot back on.”

About 3.9 million delinquent homeowners received loan modifications from January 2009 through April of this year, according to a June 6 report by the U.S. Treasury and Housing and Urban Development departments. That includes 1 million permanent payment reductions under President Barack Obama’s Home Affordable Modification Program and 2.9 million modifications started by private lenders.

Redefault Rates

The government’s plan, known as HAMP, cuts mortgage payments to 31 percent of income, while the bank programs range from reducing loan principal to increasing monthly payments for borrowers to catch up on past-due debt.

The TransUnion study looked at 559,000 homeowners who received a modification from January 2008 to July 2011 after they missed at least four monthly payments. About 42 percent of the modified loans redefaulted within 12 months and 59 percent redefaulted after 18 months.

States with the highest redefault rates were Delaware, Rhode Island, Maine, Florida and Texas, according to TransUnion. Wyoming, Montana, the District of Columbia, New Mexico and Michigan had the lowest redefault rates.

As many as 6 million borrowers will lose their homes to foreclosure in the next five years because of inability to pay their mortgages, according to Scott Simon, head of mortgage bonds at Pacific Investment Management Co. in Newport Beach, California.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE