Home / Daily Dose / Foreclosures’ Far-Reaching Implications
Print This Post Print This Post

Foreclosures’ Far-Reaching Implications

While there is plenty of data on the economic impacts of foreclosures for the various parties involved, new research from Stanford sheds light on the impacts foreclosures have on homeowners, landlords, and renters in the immediate aftermath and for years to come.  

While all three suffer in the short term, it is homeowners who seem to suffer the most and the longest, according to a working paper by Stanford economist Rebecca Diamond; Rose Tan, a Ph.D. student at Stanford; and Adam Guren, a researcher from Boston University.  

Renters are often evicted in the case of a foreclosure, which is a disruption, but they tend not to suffer long-term consequences—financial or otherwise.  

Landlords suffer financially, but they are not forced to leave their residence. The research did detect a higher rate of DUI convictions among landlords following a foreclosure.  

“What’s particularly interesting is that landlords just get the financial shock and renters just get the eviction shock, but homeowners get both shocks and the effects are far more severe,” Diamond said with the release of her working paper. “It’s the combination of the financial hit and eviction that can devastate homeowners.”  

Homeowners do not tend to rebound quickly. Instead, their living arrangements become “less secure,” they are less likely to become homeowners again, and they are more likely to default on other debts, according to the research.  

While homeowners, in general, tend to suffer following a foreclosure, Diamond found one group of homeowners who tended to incur the most severe negative consequences: “Mortgage holders who are on the margin.” 

Diamond defines homeowners on the margin as those who are behind on their home payments but had the potential to recover with debt restructuring.  

Marginal homeowners who went through foreclosure were more likely to divorce within five years of their foreclosure, more likely to move to “lower-quality neighborhoods” as defined by income levels and school test scores.  

Diamond also compared “marginal homeowners” who went through foreclosure with those who did not and found that the difference between neighborhood quality ended up widening over time between these two groups who started in a similar situation.  

Diamond advocates that policymakers address the needs of marginal homeowners in programs that help underwater homeowners.  

“There are huge, long-term harms of foreclosure that have not been on policymakers’ radars, or until now, understood from an academic perspective,” Diamond said.  

“As with any government policy, only a share of people who are eligible for a benefit ever try to take it up,” she said. “My guess is that the people who would take up an offer of help would be the most to gain.”  

About Author: Krista F. Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.

Check Also

Biden Administration Takes Action to Promote Renters, Affordability

In order to further the principles of fair housing, the Biden-Harris Administration has announced new actions to increase fairness in the rental market.