February 11, 2011 (Chris Moore)
Equifax has introduced a new method of calculating a borrower’s behavior and identify the likelihood of a mortgage default. It’s a new metric called “default distance” and it measures the time lapse, in months, between when a borrower defaults on revolving debt, such as credit card or auto payments, and when a borrower first starts the foreclosure process.
Putting their metric to the test in a recent study, Equifax found that revolving debt defaults consistently occurred before first mortgage loan defaults with the time span between them decreasing over time based on which states were hit the hardest by the economic recession and the housing market collapse.
Equifax linked anonymous borrower credit information to CoreLogic loan-level, mortgage-backed securities data to measure default distance at every point in the life of all non-agency securitized loans. Analysis was performed utilizing Federal Housing Finance Agency home price data on mortgage loans for borrowers with only one mortgage outstanding and revolving debt included credit card and home equity lines of credit.
A positive number indicates a borrower defaulted on a revolving debt first while a negative number indicates a borrower defaulted of their mortgage first.
States that have consistently had the highest foreclosure rates and hit hardest in the economic downturn like California, Florida, and Michigan had the shortest “default distances,” all less then five months, while states that have faired better economically like Texas and South Dakota had the longest “default distances,” about 15 months.
The study partially debunks the myth that high credit scores are an indicator of future credit risk as the study found that someone with respectable credit may default on their mortgage soon after they default on the revolving credit.
“In general, borrowers in these score bands consistently pay all their credit obligations on time,” Equifax said. “However, when these borrowers default on one account, many of them end up defaulting on multiple other accounts at the same time.”
Overall, the average default distance has decreased since 2005 entailing that less time elapses between revolving debt default and mortgage default.
In the end it simply proves the theory that even people with high credit scores can just as easily go bust when facing difficult economic conditions like loss of income or loss of employment.
Tags: equifax, corelogic, fhfa, mortgage loans, mortgage defaults, revolving debt, foreclosure process, default distance, credit risk, high credit scores
