Borrower credit access and credit performance after loan modifications

While the preventive effect of loan modifications on mortgage default has been well-documented, evidence on the broad consequences of modifications has been fairly limited. Based on two unique loan-level data sets with borrower credit profiles, this study reports novel empirical evidence on how homeowners manage their credit before and after receiving modifications. The paper has several main findings. First, loan modifications improve borrowers’ overall credit standing and access to credit. Modifications that provide principal reduction, rate reduction, or greater payment relief, as well as those received by borrowers not in financial catastrophe, lead to a larger improvement in borrowers’ credit rating than others. Second, loan modifications lead to a slight increase in borrowers’ debts, primarily on home equity line of credit accounts and auto loans. Third, borrowers’ performance on nonmortgage accounts, however, has not been negatively impacted by modifications. This study demonstrates that interventions designed to improve household balance sheets could have a direct and sizeable impact on borrower financial outcomes.