Foreclosure Not So Bad, Says TransUnion

Earlier this week, Housing Wire ran a report that suggested mortgage defaults are not a good predictor of future loan problems. Hat tip to @Matt_SF for pointing me to this story.

According to TransUnion, one of the “big three” credit reporting agencies and the basis of the story, people who foreclose on their homes are less likely to be a long-term credit risk than those who defaulted on other types of loans, like car loans and credit cards.

“For example, when assessing data on new auto loans, mortgage-only defaulters had a 5.8% 60-plus day delinquency rate, while those that had multiple delinquencies on credit cards and other loans had a 13.1% delinquency rate.”

That’s pretty compelling data, and a lot of smart people are trying to figure out exactly what it means. About mortgage defaulters, TransUnion says:

“It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt.”

That conclusion reflects our personal experience with people who have foreclosed–most of them are still current on other loans and credit card payments. However, the astronomical payment size many took on, and the ongoing drop in equity have pushed them to stop making payments and deal with the consequences instead.

Most of those we know intend to continue meeting all their other loan obligations, as well as purchase homes in the future at more affordable prices. So what does this all mean for credit scores?

A recent Bargaineering article looked at how adverse actions affect your credit score, and concluded that foreclosure will put your score in the high 500s or low 600s depending on where you started, and it will take 3-7 years for your score to fully recover. The only thing worse on the scale is bankruptcy, pulling you into the mid-500s and potentially hanging around for 10 years.

Given the nature of foreclosures today, the “strategic foreclosure” trend, and the apparent lack of correlation between defaulting on a mortgage and paying off other debts, the question I ask today is–is the credit penalty for foreclosure too steep?

Would adjusting it better reflect the future credit risk presented by defaulters, and/or would it encourage more foreclosures going forward? What’s more–should qualifications for future home loans and other types of loans look at different data to determine credit risk? Share your thoughts.

Photo by taberandrew

9 thoughts on “Foreclosure Not So Bad, Says TransUnion

  1. Wow, it is amazing to think that some common sense and analytics are being put into play by these guys. Yes, by the way, the hit is too step. However, they should use an inverse ‘red flag/outlier’ sanity check test. If the foreclosure is the only adverse account and all other are current and in good standing, then by all means make the hit smaller. The banks walk away, through strategic default, all the time and their credit score never seems to suffer all that much. When was the last time you heard of B of A begging for a loan.

  2. But most people who get foreclosed on will likely see a bill for the difference (if the house sold) down the road. They have around 5-7 years to make a claim. So then those same people will have to file bankruptcy on a collection of in the neighborhood of $50,000 to $200,000!

    Unless they can avoid it, which they usually can’t, bankruptcy ends up being the only solution for them, and then it’s the 7-10 year wait…

    heath

    1. As an aside, my understanding is that suing for the difference is legislated on a state-by-state basis and not the case in all states. Also in many states, the bank cannot issue a 1099 if the house was your primary residence.

      1. Of course, the best thing to do is to talk to both a foreclosure and a bankruptcy attorney. Each case (and state) is different. I know banks are more willing to do short sales now vs. 3-4 years ago, when the mess really started, at least in Florida, Arizona and Nevada.

        The other thing to note is banks are coming after people 2-3 years later; they’re waiting to see if the person is fully employed and stable. They’re racking up fees, too, which can raise the debt 20-30% or so.

        heath

      2. Yeah, it’s not fun. A few years ago, it seemed like most foreclosure cases would end with a slap on the wrist and crappy credit for a few years. Things are not so peachy anymore, and I fear we’re not nearly done with the bulk of it…

      3. It’s easy for a bank to put someone into collections and do a quick credit alert/check, and if it comes back that the person is fully employed, they’ll bide their time and rack up late charges, legal fees, etc., then strike.😦

        Listen, I don’t want to say the lenders are mean and the person who signed for the note is a victim. Legally speaking, if you signed a loan promising you’d pay the mortgage, then you’re on the hook.

        heath

      4. I have a friend who is an attorney, and he’s seen a big increase in banks putting foreclosed homeowners in collections for the difference in what the loan was for vs. what the final sale of the home was.

        He’s also seen creditors coming after people, even if the debt was written off. They wait until there is some sort of stability of employment.

        heath

  3. Not entirely true, they will either sue you for the difference or send you a 1099 in either case your will be help responsible. However, most of the time this can be arranged and managed (i.e. payments etc…)

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