Our analysis documents the substantial declines in credit scores that accompany foreclosure and examines the length of time it takes individuals to return their credit scores to pre-delinquency levels. The results suggest that, particularly for prime borrowers, credit score recovery comes slowly, if at all. This appears to be driven by persistently higher levels of delinquency on consumer credit (such as auto and credit card loans) in the years that follow foreclosure. Our results also indicate that the experiences of individuals whose mortgages entered foreclosure from 2007 to 2009 have followed a similar path to borrowers foreclosed earlier in the decade, though post-foreclosure delinquency rates for the recently foreclosed have been higher and, consequently, credit score recovery appears to be taking longer.The authors speculate in their paper as to cause and effect of the subsequent defaults in consumer credit. Bankers, however, know that one of the best indicators of a future loan default is a recent previous loan default.
Some borrowers characteristically feel less of an obligation to repay loans. Other borrowers suffer a persistent economic shock, such as a loss of a job, death of a wage earner, divorce, or an unexpected major expense, which impairs the borrower's ability to repay the loan.
Foreclosure in many cases is a signal of a borrowers unwillingness to repay or of the borrower's inability to repay due to loss of income from an economic shock.
I would guess that if the researchers looked at an opposite effect, consumer credit card and auto loan defaults prior to a foreclosure, they would have found a similar effect, but with the order of the loan defaults reversed. They would have found that consumer credit card and auto loan defaults of mortgage borrowers impaired future credit scores from subsequent mortgage foreclosures.
No comments:
Post a Comment