By Michael Schrieber
A study published last May by researchers at the Federal Reserve has been getting a bit of buzz of late due to its surprising findings about the nature of the foreclosure crisis. The paper acknowledges that the crisis is widespread, but also suggests that the quality of life in the aftermath of a foreclosure may not be as painful as many of us might have assumed.
The paper, called “The Post-Foreclosure Experience of U.S. Households” was written by Raven Molloy and Hui Shan, and the ideas in it do not represent the position of the Fed or members of its Board of Governors. This paper, and others like it that the Fed publishes, are designed to stimulate discussion. And this one is doing just that.
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A nearly incredulous Joel Sucher recently wrote about the paper at American Banker. Sucher is a documentary filmmaker working on a film about foreclosure and observed:
“It seemed that these intrepid statisticians had entered a no-man’s land of sorts, proclaiming that not much has been done to study the lives of those who have involuntarily left their homes…. On the face of it, foreclosure couldn’t be a good thing, could it? You didn’t have to be a scientist or statistician to figure that one out. But Shan and Molloy did uncover a happy face of sorts. The foreclosed weren’t quite as bad off as you’d expect.”
Now, we should clarify that no one at the Fed is suggesting that a foreclosure isn’t a traumatic experience, and that experience is unfortunately being shared by a significant number of Americans, as the chart below demonstrates.
That said, the key findings in this paper are surprising on some level. Here they are, for your consideration:
- “Only about half of borrowers whose mortgage enters foreclosure have moved even two years later, suggesting that many foreclosures are worked out through refinancing or other means.” (Another thing to consider is that the foreclosure process often takes longer than two years. In New York and New Jersey, the average duration of a foreclosure is more than 900 days.)
- “As for borrowers who do move after a foreclosure, they do not seem to end up in substantially more crowded living conditions or less-desirable neighborhoods.”
- “Although foreclosure increases the probability that an individual will move to a multifamily building, most post-foreclosure migrants remain in single-family structures.”
- “Their new neighbourhood does not have significantly lower median income, median house value, or median rent than their old neighbourhood. Given that housing unit quality is highly correlated with neighbourhood affluence, our evidence suggests that post-foreclosure migrants do not move to substantially lower quality housing units.”
So what does all of this add up to? The paper goes on to say that the evidence suggests that, “on average, the post-foreclosure reduction in housing consumption is relatively minor.” In other words, as painful as the foreclosure process may be, not to mention the contributing factor that may have led to the foreclosure (loss of job, illness), the paper posits that post-foreclosure living situations aren’t too dissimilar from pre-foreclosure living situations.
The authors do suggest that their methodology may have created some gaps in their reporting. For example, the study makes the general assumption that when a foreclosure causes someone to move to a new house in the same neighbourhood, it’s likely that the house is similar to their previous house in terms of size and quality. They note, however, that “it is possible that we define neighborhoods too broadly, thereby overlooking significant within-neighbourhood variation in housing unit quality. In this case, post-foreclosure borrowers could be moving to smaller, lower quality housing units in neighborhoods that appear to be no worse than their original neighbourhood.”
They study is definitely interesting, and though its findings may well be offensive to someone actually going through a foreclosure, it’s no less worth examining. The foreclosure crisis has been devastating to millions of families, but there’s no shortage of houses (for now anyway) and we don’t see tent cities popping up in Central Park and elsewhere as there was during the Great Depression. But there are exceptions elsewhere in the United States—see recent stories about tent cities in New Jersey and Virginia, for example—and the rise of a different kind of tent city in lower Manhattan is evidence of just how strongly people feel about the overall state of the economy, particularly the wide gap between the haves and have nots.
If you’re going through a foreclosure, or fear that you may be facing one in the future, please share your story in the comments section. Do the findings in the Fed paper surprise you? Are they missing anything? We want to hear from you.