June 3rd, 2011 10:34 AM by Lehel S.
Popular wisdom holds that people who lose their homes to foreclosure must be irresponsible deadbeats who can't handle money.
But a new study shows that many homeowners who defaulted on their mortgages during the economic downturn subsequently proved to be responsible consumers and good credit risks.
"Certain consumers who defaulted on a mortgage in the recent recession only did so because of the recession - they are otherwise good credit risks," the report said.
The study doesn't come from a pro-consumer advocacy group but from TransUnion, one of the three national credit bureaus (along with Equifax and Experian) that collect information on Americans' borrowing and bill-paying habits.
As such, it carries significant weight and could influence how lenders view defaulting homeowners. While it's unlikely to change how mortgage delinquencies affect consumers' credit scores, it provides guidelines for lenders to consider mitigating circumstances such as job loss in extending credit to people who fell behind on their home loans.
"Lenders always try to distinguish a one-off, life-crisis event like divorce or a medical catastrophe versus people who are just ineffective at managing credit," said Ezra Becker, TransUnion vice president of research and consulting, and one of the study's authors. "Our argument is that this economy disproportionately affected certain people in a way akin to a one-time crisis. Those consumers have not in fact forever changed their personal philosophy on repaying debt. It was a one-time event because of the specific and personal circumstances of the recession, and they otherwise would be good credit risks."
TransUnion reviewed data from 5 million randomly selected mortgage holders to find 129,000 people who were 120 days or more behind on home-loan payments, and who had additional lines of credit, such as car loans, credit cards and student loans, including lines opened both before and after missing the mortgage payments. It followed their loan performances over 12 to 17 months.
It found that consumers whose only delinquencies were on their mortgage (as opposed to ones who previously were late on credit card payments and other loans) "do indeed present less credit risk," Becker said. "It's the environmental impact (of the recession and high unemployment) that has come into play for those consumers."
Advocates who work with defaulting homeowners said the report confirms their perceptions.
"Most people I've talked to (who lost their homes to foreclosure) were very sensible, had saved a long time, worked very hard and figured out what they could pay," said the Rev. Lucy Kolin, pastor at Oakland's Resurrection Lutheran Church and co-chair of the faith-based Oakland Community Organizations network. After foreclosure "they went back to their regular fiscal practice of making a budget, paying their bills and keeping current."
At Sunnyvale's Project Sentinel, Sharleen Kilgore, deputy director of housing counseling, said: "What I find typically is people who've been through a foreclosure have taken a significant hit on their credit and are very anxious to improve their credit score because credit rules our lives - you can't rent, buy a car, or do a lot of things without it. Once that heavy burden of the mortgage payment is no longer on their shoulders they have the ability to meet their obligations and save for the first time in many years."
Sheri Powers, director of the homeownership center at Oakland's Unity Council, said that foreclosures are so common now that many landlords are willing to overlook that blemish on people's credit records.
"We find that more landlords are open to renting to people who had a foreclosure," she said. "I suggest they offer an additional deposit with a stipulation on the lease that after 12 months of paying on time it gets refunded back or applied to the rent."
Many experts point out that while the first wave of foreclosures hit people who got unsustainable subprime loans, the current wave of foreclosures is mostly among people who underwent job loss or reduced income.
Oakland's Lilian Cabrera fits both categories. The economic downturn cut into her earnings from the insurance agency she owns in the Fruitvale district. At the same time, she had an adjustable mortgage that increased significantly. She got a temporary loan modification and made 14 payments, but never received a permanent modification. No longer able to keep up, she is contemplating either selling the house for less than she owes or letting it go to foreclosure.
"I still pay all my other bills," she said. "It's just this one; I couldn't pay an extra $1,000 a month."
She is determined to recover her profile as a reliable consumer.
"I'm going to rebuild my credit and keep it up," she said. "I'll keep everything current."
-- Pay your debts consistently on time every month, even if it's only the minimum payment.
-- Be patient. Companies offering quick-fix solutions generally are ineffective. Building a positive credit profile takes many months of regular payments.
-- Be proactive when you're in a cash crunch; contact lenders before going delinquent to ask for forbearance or temporary lower payments.
-- Keep your credit-card balances below 30 percent of your allowable maximum. For instance, if your Visa card has a $1,000 limit, don't run up more than $300 of debt on it.
-- Check your credit reports. www.annualcreditreport.com lets you order reports for free.