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Borrower Credit Access And Credit Performance After Loan Modifications

Author

Listed:
  • Lei Ding

Abstract

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 (HELOC) 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 sizable impact on borrower financial outcomes.

Suggested Citation

  • Lei Ding, 2016. "Borrower Credit Access And Credit Performance After Loan Modifications," Working Papers 16-26, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:16-26
    as

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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2016/wp16-26.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    loan modification; credit scores; credit performance; mortgages;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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