Lower mortgage rates reduce credit card failuresby Peter Miller
What happens when a household gets a mortgage modification? Usually, their mortgage rates go down, monthly costs decline and household wealth improves. And when households have more cash, they tend to spend more, an economic upside for everyone.
For the second year in a row, TransUnion has conducted a study which shows that when home loans are modified and monthly costs are reduced, there’s a very visible side benefit: credit cards and other debts have lower default rates.
Lower rates all around
For instance, the default rate on auto loans is 11.4 percent when the borrower has not had a mortgage modification. But, modify the mortgage and the default rate drops to 6.06 percent.
The same finding was also found with credit cards. Households with unmodified mortgages have a credit card default rate of 17.13 percent. However, households with a modified mortgage only have a credit card default rate of 13.63 percent. Relatively speaking, these are both very high rates of failure, but far less higher when a mortgage rate has been reduced.
“In the 12 months after new loan origination, consumers with a mortgage mod had an average 18% lower delinquency rate on new credit cards than those with no modification, and a nearly 50% lower delinquency rate on new auto loans,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit.
Borrowers want to pay off debt
The TransUnion study suggests that most borrowers want to be responsible and pay back their debts, and that the purpose of a mortgage modification is not somehow to abuse the financial system, it’s to make good on promised repayments.
This raises the idea that instead of still another program to bail out the banks, maybe we ought to help mortgage borrowers in general. The Federal Reserve announced it will “continue reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS, and to suspend, for the duration of the maturity extension program, rolling over maturing Treasury securities into new issues at auction.”
In other words, the Federal Reserve is going to try to keep mortgage rates low, if not lower, in an effort to spur more business investment.
But if interest rates are so low, what’s the attraction for investors? As an alternative, why not encourage borrowers with good payment histories to automatically qualify for mortgage modifications at today’s new and lower mortgage rates? That would give households more cash, and more cash would allow them to pay off a variety of debts–which, as the TransUnion report shows–is what people do.