Equifax is going to distance, literally, to help lenders evaluate the likelihood of mortgage default. It’s new metric, “default distance,” is designed to measure the time lapse between a borrower’s initial default on any revolving debt such as a credit card or a car loan, and when that borrower enters the foreclosure process[1]. In a recent study, Equifax measured the efficacy of its new measurement, finding that “revolving debt defaults consistently occur before first mortgage loan defaults with the timespan between them decreasing over time”[2]. Essentially, the closer together the revolving debt defaults, the more likely a mortgage default is on the horizon. However, strategic defaults may be skewing the perceived “distance” somewhat.

Default distances are shortest in states hardest hit by the recession and the housing market collapse, making Florida, California and Michigan the states with the shortest default distances (less than five months). Texas and South Dakota came in with the longest distances of about 15 months. Interestingly, high credit scores do not necessarily mean long default distances because “in general, borrowers [with high credit scores] consistently pay all their credit obligations on time, [but] many of them end up defaulting on multiple other accounts at the same time.”

Do you think that default distance should play a role when lenders evaluate applicants for mortgages?

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[1] http://shortsaledailynews.com/equifax-gives-lenders-tool-to-measure-mortgage-default-likelihood/

[2] http://www.housingwire.com/2011/02/07/equifax-introduces-default-distance-to-measure-likelihood-of-mortgage-default