Expert Commentary

Post-foreclosure experience of U.S. households

2011 paper by the Federal Reserve Board on the impacts of a foreclosure on credit scores, borrowing and housing consumption.

Foreclosed house (iStock)

In 2010 a record 3.8 million foreclosures were filed in the United States, up 2% from 2009 and 23% from 2008. This crisis resulted in part from relaxed lending standards and the housing bubble created by the ballooning subprime mortgage market. With millions of borrowers living post-foreclosure lives, it is essential for policy makers, lenders and the public to better understand the financial and social consequences of foreclosure.

A 2011 paper by the Federal Reserve Board, “The Post-Foreclosure Experience of U.S. Households,” used credit reports from more than 37 million individuals between 1999 to 2010 to measure post-foreclosure behavior, especially in regard to future borrowing and housing consumption.

Findings of the paper include:

  • Propensity to relocate: On average 23% of people experiencing foreclosure had moved within a year of the foreclosure process starting. In the same time, a control group (not facing foreclosure) had only a 12% migration rate.
  • Neighborhood quality: Only 30% of post-foreclosure borrowers moved to neighborhoods with median income at least 25% lower than their previous neighborhood.
  • Living situation: The majority of post-foreclosure migrants do not end up in substantially less-desirable neighborhoods or more crowded living conditions.
  • Household composition: There was no significant difference in household size between the post-foreclosure and control groups. However, only 17% of the post-foreclosure individuals had the same number and composition of household members after a foreclosure than before. By comparison, the control group maintained the same household companions in 46% of cases.
  • Renting over buying: Only about 20% of post-foreclosure individuals chose to live in households where one person maintained a mortgage.

The authors conclude that, overall, individuals who experienced foreclosure did not see severe declines in their housing consumption. “It is difficult to say whether this small effect is because the shock that leads to foreclosure is not long-lasting, because the credit constraints imposed by having a foreclosure on one’s credit report are not large, or because housing services are more inelastic than other forms of consumption,” they state.

Tags: financial crisis, employment, consumer affairs, campaign issue

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