Six out of 10 homeowners who received a loan modification stopped paying their mortgage again after 18 months, but there may be a modest silver lining buried in the high recidivism rates.
A study by TransUnion has found that borrowers who received a mortgage modification performed materially better on new auto loans and credit cards than those who did not receive any help, an indication that some consumers who fall far behind on monthly bills are able to regain their financial footing.
"Once consumers have gone through a serious delinquency, there is still an opportunity to lend to them down the road," says Charlie Wise, TransUnion's director of research and consulting. "We're going to see more and more consumers that had a loan modification and the mere presence of a modification, regardless of whether the borrower continues to pay, would indicate better performance" in paying other debts.
Researchers examined data on five million mortgages including 600,000 borrowers who received a modification between January 2008 and July 2011.
The study found that borrowers who had previously gone delinquent only on their mortgages — but not other loans — were better credit risks than borrowers who went delinquent on other loans as well as their mortgages.
Still, high recidivism rate are a concern since most of the borrowers will redefault within 18 months and are likely to end up in foreclosure. The study also found that nearly 42% of borrowers who received a loan modification stopped making payments within a year.