Who You Calling a Deadbeat?

Turns out that all mortgage defaulters are not created equal.

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People who have had their homes foreclosed on are typically portrayed either as budgeting dimwits or craven opportunists who just want to freeload off their hardworking neighbors. A new study from credit reporting bureau TransUnion dispels both of those stereotypes.

As reported by the San Francisco Chronicle, TransUnion ran the numbers on 129,000 people who had a mortgage 120 days past due, some of whom had defaulted on other loans or credit cards, and others who had no credit blemishes aside from the mortgage nonpayment. They controlled for credit score by matching serial defaulters and mortgage-only defaulters in a similar score range, then watched what happened when these consumers opened new lines of credit. The results? [time-link title="(Read about Deutsche Bank being sued for mortgage fraud)" url=http://www.time.com/time/business/article/0,8599,2069382,00.html]

Sorry, Rick Santelli: Not everybody in foreclosure is a deadbeat. For people who regularly paid their bills on time, failure to pay their mortgage tended to be an uncharacteristic deviation that didn’t change their future financial habits. In the case of people who regularly had trouble making payments on time, foreclosure didn’t change their habits for the better — chronic late-payers defaulted on future payments at more than twice the rate of those who didn’t have checkered payment histories.

This dovetails with an earlier TransUnion study showing that many Americans, when forced to choose, are paying their credit card bills before their mortgages. A TransUnion analyst told Reuters this finding “goes against conventional wisdom,” but economists and bloggers alike pointed out that you can’t buy gas, groceries or medicine with your house.

For people who went through a foreclosure, this research is good news. If credit-issuing banks come to the same conclusion as TransUnion — namely, that not all people who default on a mortgage are created equal — then they’re likely to begin breaking down mortgage defaulters by risk level rather than lumping them all together. Borrowers with a history of less risk may find it easier or cheaper to get credit in the future. [time-link title="(Read about some common credit score myths)" url=http://moneyist.time.com/2009/09/09/credit-scores-myths-are-busted-but-the-system-still-doesnt-make-sense/]

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