The Post-Foreclosure Experience in America

 

Molloy and Shan were then able to compare the behaviour of households with similar credit histories and observe differences that occurred in households that had undergone foreclosures to those that had not (the comparison group or control group).  They noted that borrowers that experienced foreclosure during the early part of the decade were different than those in the latter part; later borrowers tended to be current on their mortgages, credit cards and auto loans in the year prior to the foreclosure and generally had higher credit scores.  They also note that the foreclosure group appears to be generally more economically disadvantaged than the comparison group since they have fewer credit card accounts and auto loans.

 

Now on to their findings.  We’ll look at the impact of foreclosures on post-foreclosure migration, post-foreclosure household size and composition, post-foreclosure accommodation and post foreclosure migration distance.

 

1.) Post-foreclosure migration:  Keeping in mind that the authors are comparing behaviour between the foreclosure group and the comparison group, they noted that "foreclosure starts", the time when a loan enters the foreclosure process, generally increased the probability of moving over the subsequent two years.  Within the first year, 23 percent of foreclosed individuals move compared to only 12 percent in the control group.  This gap widens during the first two years and by the third year, nearly half of the post-foreclosure individuals had moved, 23 percentage points higher than the control group, nearly double the rate of the comparison group.   However, they noted that nearly half of individuals had not moved in the first two years suggesting that in some markets, refinancing is possible and that the foreclosure process is not carried through to completion.

 

2.) Post-foreclosure household size and composition:  The authors noted that average household size does not change much for either a household that has undergone foreclosure or the control group that had not undergone foreclosure.  Household composition in post-foreclosure cases tended to change more than the control group but, in general, there is little evidence that people end up living in larger households in an attempt to assist with living expenses after a foreclosure.  This is not the result that one might anticipate; one would expect that foreclosed households might increase in size to reduce overall household expenditures on a per person basis.  While household size does not change, household composition changes markedly.  In the comparison group, 85 percent of individuals lived with exactly the same household members as they did three years earlier.  In the post-foreclosure households, less than half of the individuals live with exactly the same household members as they did prior to the foreclosure.  This could be due to stress caused by the foreclosure process or that life events such as illness or divorce result in both foreclosure and changes in household composition.  Post-foreclosure individuals living with an adult that is at least 20 years older than them (i.e. parents) increase to 12 percent compared to 5 percent for those in the comparison group.

 

3.) Post-foreclosure accommodation:  Households that have undergone foreclosure tend not to have mortgages in the two year period after foreclosure and tend to be renters in single family units.  Only 6 percent of post-foreclosure individuals had mortgages in the second year after the start of their foreclosure.  Approximately 60 percent of post-foreclosure individuals live in single-family structures with no mortgage (i.e. rental property).  Most move to higher density neighbourhoods with lower overall home ownership rates.  These neighbourhoods tend to have a higher fraction of lower income households headed by females living in smaller homes.  That said, the new neighbourhoods tend not to be less desirable than the original in most cases; only about 30 percent of post-foreclosure households move to neighbourhoods that have a median household income that is at least 25 percent lower than their previous neighbourhood, only a few percentage points more than the comparison group.