Foreclosures Can Have Lasting Credit Effects

   

Posted: Oct 27, 2010

Losing a home through foreclosure can be a life-altering experience, both emotionally and financially, and relief for homeowners isn't expected to come soon. Banks are expected to reclaim over a million homes in 2010, up from last year's record-breaking figures.

The number of consumers who have damaged credit scores from home loans has continued to grow, following the crisis in the housing market. Since the beginning of 2007, an estimated three million homeowners have gone through the foreclosure process. Economists estimate that one in four households owe more on their mortgages than their houses are worth — known as underwater mortgages.

The housing market continues to look bleak. In the third quarter of 2010, foreclosure filings increased by four percent to almost a million, or one in every 140 households, according to the San Francisco Chronicle.

The foreclosure process can also be time-intensive, taking many steps before completion. In a foreclosure, the banks terminate mortgages and regain the property from the borrower. However, even before a foreclosure is filed, there are typically missed payments to creditors and lenders that result in further credit damage, even if no eventual foreclosure is reached.

Typically, a "Notice to Accelerate" will be given after three missed payments, giving homeowners 30 days to catch up on payments. After four missed payments, the lender will likely turn over the case to lawyers and begin foreclosure proceedings.

However, before foreclosure occurs, consumers can try to short-sell a home, modify a loan, or use a government loan to refinance the house.

Homeowners who have the misfortune of going through the foreclosure process typically report a host of problems, including higher insurance premiums, lost access to credit cards, and lack of access to car loans, according to a report by NPR. Another issue is the stigma that comes with being labeled as someone with bad credit, especially for those who typically enjoyed high scores.

"I tried to work deals, saying, 'Hey, we'll double the security deposit. Or we'll sign on for a two-year lease right now if you're looking for somebody,'" Steve Pacheco, a foreclosed homeowner, told NPR. "It didn't seem to matter. As soon as they heard 'foreclosure' or saw my credit report, that was it for them, they weren't willing to work with us."

A foreclosure can stay on a credit report for seven to ten years, affecting even those who previously had pristine financial histories.

Losses on foreclosures hurt not only homeowners, but also banks and the larger economy, which relies on the industry to create jobs that keep communities and the country thriving.

Some have asked for government intervention into the housing crisis, calling for a moratorium on foreclosures. While that option hasn't been ruled out, a bill was recently struck down by President Barack Obama, who sent it back to Congress before the mid-term recess.

"We believed it [was] necessary to have further deliberations about the intended and unintended impact of this bill on consumer protections, including those for mortgages, before this bill can be finalized," White House communications director, Dan Pfeiffer, told Reuters.

The proposal did have unintended benefits, however. Following the publicizing of the proposal, GMAC Mortgage, JPMorgan Chase, and Bank of America all announced that they would temporarily suspend foreclosures to review the internal processes, Reuters reported.

Lenders say that foreclosures should be allowed to continue, arguing that while some foreclosures may have been conducted improperly, there are some that are necessary for the health of the housing market. While homeowners support efforts to halt foreclosures, some experts believe this risks further damaging the economy.

Regardless of the outcome, foreclosures will likely be a huge financial issue for years to come.