A home foreclosure is the most damaging event to the credit history of an American consumer. Credit mishaps such as late mortgage payments, credit card write-offs or automobile repossessions always carry a heavy penalty in the form of a blemished credit history that takes years to remedy. Mortgage underwriters are always on the lookout for such negative credit events, and when they run into a foreclosure they are likely to click on the rejection button of their loan analysis software interface.
There seems to be an additional stigma that keeps foreclosed homeowners out of the housing market for long periods. According to a research paper published by economists at the San Francisco Federal Reserve Bank, the majority of borrowers who experienced a foreclosure choose to stay away from homeownership even after their credit had been thoroughly repaired.
The Pesky Rate of Delinquency
It took two years after the American housing market crashed for delinquency rates to reach record highs. The mortgage delinquency rate in 2010 was 11 percent. Since then, the rate has managed to remain at pretty much the same level. Researchers blame the high incidence of underwater mortgages for this continued delinquency. Borrowers who would otherwise do everything to avoid foreclosure fall into complacency when they realize that their homes are worth less than the mortgages they owe.
The San Francisco Fed study has found that even though 30 percent of foreclosed homeowners returned to credit score greater than 650 within five years, they largely abstained from the real estate market. Those who venture into filling out mortgage applications do not get any breaks from lenders, something that ends up dampening their hopes. Mortgage lenders blame the current rate of delinquency for their strict attitude towards those who went through a foreclosure, and thus they become stuck in a vicious circle.
A Boon for the Rental Market
As long as the delinquency rate remains high, lenders will continue to be strict against applicants who lost their homes to foreclosure. In the meantime, landlords and real estate investors are making the most of the situation. Apathy in the mortgage markets translates into a windfall for the rental market, and there is a good chance that renters will turn a blind eye on future homeownership opportunities, even as the American economy improves. In such case, they can just move to a nicer rental property.