How Are They Now? A Checkup on Homeowners Who Experienced Foreclosure

Andrew Haughwout, Donghoon Lee, Daniel Mangrum, Belicia Rodriguez, Joelle Scally, and Wilbert van der Klaauw

May 8, 2024

The end of the Great Recession marked the beginning of the longest economic expansion in U.S. history. The Great Recession, with its dramatic housing bust, led to a wave of home foreclosures as overleveraged borrowers found themselves unable to meet their payment obligations. In early 2009, the New York Fed’s Research Group launched the Consumer Credit Panel (CCP), a foundational data set of the Center for Microeconomic Data, to monitor the financial health of Americans as the economy recovered. The CCP, which is based on anonymized credit report data from Equifax, gives us an opportunity to track individuals during the period leading to the foreclosure, observe when a flag is added to their credit report and then—years later—removed. Here, we examine the longer-term impact of a foreclosure on borrowers’ credit scores and borrowing experiences: do they return to borrowing, or shy away from credit use and homeownership after their earlier bad experience?

Foreclosure Notations on Credit Reports
Foreclosures are associated with a flag on the credit reports of mortgage borrowers, which is similar to what happens after an individual files bankruptcy. Information related to foreclosures (“foreclosure notes”) may not remain on a credit report for more than seven years, as stipulated in the Fair Credit Reporting Act (FCRA). These negative notes on credit reports are visible to creditors and limit the borrowers’ access to credit by reducing their credit scores and enabling lenders to decide whether to lend to those who previously foreclosed. The FCRA guidance protects borrowers by providing a finite window during which their access to credit may be limited due to their past delinquency and default. Because they stick for seven years, the flags accumulated during the Great Recession were slated to remain for years after it ended. In the chart below, we show (in the red line) the number of consumers with new foreclosures observed each year. The blue bars show just how many people had a foreclosure note on their credit report; by 2016, the number of individuals with a foreclosure mark had finally begun to return to more normal levels as the flags aged off.

SNIP The foreclosure flags have long disappeared from the credit reports of the nearly 5 million Americans who experienced a foreclosure during the housing bust, yet the financial scarring has lingered on their financial experience in various ways—they have persistently lower credit scores and are less likely to own a home. These consequences are long-term, especially for new entrants to homeownership, resembling in some ways the long-term scarring effects on earnings and employment for young workers who first enter the labor market during recessions.

https://libertystreeteconomics.newyorkfed.org/2024/05/how-are-they-now-a-checkup-on-homeowners-who-experienced-foreclosure/