What Happens After Foreclosure

It has been difficult to determine what happens to residents, and houses, following foreclosures.

With regard to the residents, there had been reports suggesting many became homeless or doubled-up with family or friends. For tenants of rented houses subject to foreclosure, concerns that they would be evicted led to legislation in 2009 protecting tenants.

A recent study by Federal Reserve economists Raven Molloy and Hui Shan, based on credit bureau data, sheds new light on the fate of homeowners subject to foreclosure. Their data set includes the start of the foreclosure process, but does not show the completion. The data show where the individuals in the household lived two years after the foreclosure was initiated. Molloy and Shan find that half of the households were still in their homes after two years, reflecting the lengthy foreclosure process. There was little evidence that those subject to foreclosure moved in with parents or were otherwise doubled-up. The most common trajectory of those who were no longer in the foreclosed home was movement into a rented single-family home.

Other data sources don't offer much information about the effect of foreclosures on households. Government surveys such as the Current Population Survey and the American Housing Survey ask people who moved the reason(s) why they did so, but foreclosure is not among the explanations listed.

Credit bureau data have great potential, but are not available to most analysts. At a presentation in November 2010 by Robert Avery, another Federal Reserve economist, regarding plans for a national mortgage database using credit bureau data, I asked whether that data set could potentially be used to track people after foreclosure. His reply: "Your ex-wife may not know where you are, but the credit bureaus will."

It would seem that it ought to be easier to find out what happens to properties than what happens to people after foreclosure, but that's not simple either. There is information about how many become REO (real-estate owned by financial institutions), but not much about what happens after resale. Surveys of real estate agents by the National Association of Realtors or private firms such as Campbell Communications indicate that REO properties are disproportionately sold to investors, apparently for use as rentals.

There has been a substantial transfer of single-family housing into the rental market. It seems logical that much of that movement is connected to defaults and foreclosures. I thought the relationship could be illustrated by a correlation between state-level defaults and foreclosures and relative growth in the number of single-family rentals, but the states with the greatest increases in single-family rentals, as measured by the American Community Survey, were not the states where the largest shares of mortgages have been in default and subject to foreclosure. So much for that idea.  Although foreclosures no doubt often result in rentals, there are too many other factors to explain shifts in the housing stock to rental use entirely based on defaults.

August 8, 2011 -

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