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