Getting Back on Track: An Exploration of Loan Modification: A TransUnion Study Focused on Seriously Delinquent Mortgage Borrowers Who Had Obtained a Mortgage Modification and Then Subsequently Opened New Consumer Loans. the Results Can Help Lenders Understand Whether It's Possible for Such Borrowers to Get a Fresh Start

Article excerpt


IT USED to be that when consumers became seriously delinquent on their home mortgages--that is, three or more payments past due--one of two outcomes was possible. The first was that they could "cure," meaning that they would bring their past-due accounts current and resume payments. While generally a happy outcome for both borrower and lender, this result is, unfortunately, uncommon. The second outcome was that the borrower would progress to foreclosure, which is generally an unhappy outcome for both borrower and lender and, unfortunately, the more common result.

Following the recent recession, with the U.S. experiencing record-high mortgage delinquency rates and a commensurate rise in foreclosures, a third outcome--loan modification--has emerged. The U.S. government established a number of loan modification programs under the Making Home Affordable Act of 2009, including:

* The Home Affordable Refinance Program (HARP, 2009 and 2011), which aimed at helping non-delinquent mortgage borrowers refinance into lower-rate loans.

* The Home Affordable Modification Program (HAMP, 2009), which aimed at helping delinquent mortgage borrowers reduce their monthly payments through a combination of modifications to loan rate, term, and principal amount.

The general goal of these government-sponsored programs, as well as modification programs initiated directly by lenders, is to keep homeowners in their homes by making their mortgages more affordable. For modification programs aimed at delinquent mortgage borrowers, a broader goal of a loan modification may be to give borrowers a fresh start. It may provide them an opportunity to get their finances and credit back on track, including the ability to access new consumer loans following the mortgage modification.

Several years have passed since the inception of these modification programs. In a 2012 study, TransUnion explored the extent to which these programs have achieved the broader goal of getting delinquent borrowers back on track.

Study Design

TransUnion's study focused specifically on seriously delinquent mortgage borrowers who had obtained a mortgage modification and then subsequently opened new consumer loans. The study was designed to answer several key questions:

* Do these modification programs succeed in giving seriously delinquent borrowers a fresh start?

* How do consumers perform on new loans opened following a mortgage modification?

* Under what circumstances do consumers perform better on modified mortgages and on other consumer loans originated after the initial mortgage default?

TransUnion's study reviewed more than 5 million mortgage loans that were originated prior to 2008 and that had gone 120 days or more past due between January 2008 and June 2010--in other words, seriously delinquent mortgage borrowers who were unlikely to cure their delinquent status without a modification or other assistance. Of those mortgage loans, approximately 559,000 records of mortgage modifications between January 2008 and July 2011 were identified. We were able to identify the presence of a mortgage modification based on loan data transmitted by mortgage lenders. The initial level of analysis was to determine how borrowers performed on the modified mortgage over 6-, 12-, and 18-month periods.

The second level of analysis was to examine the performance of new consumer loans opened by borrowers who had obtained a loan modification and to compare the new loan performance to that of seriously delinquent mortgage borrowers who had not obtained a modification. We identified approximately 627,000 new loans, primarily auto loans and credit cards, opened by borrowers with a mortgage modification after the initial mortgage default between January 2008 and July 2011. We analyzed the 6-, 12- and 18-month performance of these new loans and compared the results against the performance of the approximately 3. …