The financial implications of foreclosure are enormous, especially for lower income households. The immediate loss of the home and the corresponding decrease in household net worth are most dramatic. However, foreclosure also damages a consumer’s credit, and due to the rising importance of credit and credit scores in all areas of our lives, the adverse impacts of foreclosure over time can be just as devastating. In order to begin to address this problem, we need to understand not simply its magnitude but its diverse underlying causes, for these will shape the kinds of policy interventions that might be appropriate.
The foreclosure crisis
There have been a record number of foreclosures in the past two years, and significantly more are projected in the next five years. 1 In 2008, there were over three million foreclosure filings, and over one million homeowners lost their homes to foreclosure. In 2009, the number of foreclosures is projected to more than double. 2 The problem shows no signs of abating, as nearly one out of every ten homeowners is currently delinquent on their mortgage. 3 The causes of foreclosure have evolved over time. Initially, many of the individuals who lost their homes were victims of subprime mortgages or had exotic, adjustable rate mortgages that they could not afford. More recently falling home values and rising unemployment have increased the number foreclosures, and have compounded the difficulty of dealing with foreclosures.
What is the connection between foreclosure and credit scores?
A consumer’s credit score declines significantly as a result of foreclosure. 4 For individuals who have lost their jobs or have declared bankruptcy, the implications of foreclosure are most severe and long-lasting. Given the magnitude of the foreclosure crisis and the rising number of unemployed, it’s clear that we are facing a significant problem for the foreseeable future with the number of individuals in this country with impaired credit.