Ten years later: Foreclosed borrowers still pay price

Only 30 percent of borrowers who defaulted on their mortgage in 2001 had returned to the housing market within 10 years, according to a new study conducted by researchers at the Federal Reserve Bank of San Francisco.
The study evaluated how long it takes borrowers to re-enter the housing market following a default on a previous mortgage.

Only 10 percent of homeowners with a “serious delinquency” were able to qualify for a mortgage within 10 years after a default, according to the study.
The access to credit is the main hurdle restricting most borrowers from re-entering the housing market. The average borrower who goes through a foreclosure ends up with a credit score below 600 as a result, the study finds.

“The rate at which borrowers get new mortgages after defaulting on a mortgage is low,” researchers note. “What explains the pace of return to the mortgage market? Overall economic conditions appear to play an important role in allowing borrowers who have defaulted to return to the market. When we control for factors such as local unemployment rates and past house price appreciation, we find that these variables influence the rate at which defaulters come back to the mortgage market.”

The best predictor ever of when a defaulting borrower will return to the market is the change in the borrower’s credit score, researchers note. After five years from the default, borrowers who return to the mortgage market have seen a more than 100-point jump in their credit score.