Home Foreclosures Decimate Credit Scores

Caught between a rock and a hard place, homeowners are being squeezed. The financial hardship of long-term unemployment and the toll it takes on credit scores, coupled with banks’ unwillingness to modify mortgage loans, is forcing many long-time American homeowners into foreclosure. With unemployment rates expected to remain high for at least the next year, possibly longer, real estate industry experts say the problem is only going to get worse.

“There’s nothing happening right now in terms of foreclosures that makes me think there’s and end in sight,” Ken Gold, director of the Center for Real Estate Education and Research at Ohio State University, recently told The Columbus Dispatch. “It’s now being driven by unemployment and by what’s happened in the past with the banks. And it’s supply and demand: There’s plenty of supply and little demand for homes.”

According to the Mortgage Bankers Association, national mortgage delinquencies reached record levels in the first quarter of 2010. More than 10% of homeowners had missed at least one mortgage payment, a 10% increase over the previous quarter. Nearly 4.3 million U.S. homeowners – 8% of all mortgage holders — are in foreclosure and the number is growing.
Though battered and beaten, homeowners’ financial woes may not end when they hand their deed over to the bank. In an effort to recoup the money they’re losing on short sales and foreclosures, some banks are hounding borrowers to cover the loss. In June, The Washington Post recounted the experience of a Virginia homeowner whose bank billed him $148,064 to cover the shortfall when his foreclosed home sold for less than the amount due on his mortgage loan. With no resources to pay the debt, the homeowner was forced to file for bankruptcy protection.
Before the housing bubble burst, foreclosures were low and banks seldom chose to pursue deficiencies, but times have changed and banks are getting aggressive. What most over-stressed homeowners don’t realize is that there are other options to foreclosure that can allow them to keep their homes and minimize damage to their credit score. We’ll talk about those next time.