ByBen Leubsdorf
The sheer number of foreclosures during the recession may have helped some Americans pay off other debts, such as credit-card bills.
- Bloomberg News
Foreclosures rose sharply during the recession, peaking around 2009, and the timeline for processing them stretched out in some states to as long as three years. That allowed people to remain in their homes longer without making mortgage payments, freeing up money for other expenses, according to research from the Federal Reserve Bank of Philadelphia.
“Our findings indicate that households do not consume all the benefits from temporary relief from housing expenses; instead, they use that temporary relief to cure their bad nonmortgage debts and improve their balance sheets,” wrote Paul Calem,Julapa Jagtiani and William W. Lang, all economists at the Philadelphia Fed, in a recent working paper.
The economists looked at data from U.S. households that were already delinquent on at least one credit card before falling behind on mortgage payments and going into foreclosure from 2004 through 2010. Their analysis of more than 27,500 loans found people whose foreclosures took longer to process were more likely to pay off nonmortgage debt like credit cards.
“We demonstrate empirically that households experiencing longer foreclosure time periods are more likely to pay off their credit card debt and become cured,” i.e., “returning to a current status on their credit cards again,” Mr. Calem, Ms. Jagtiani and Mr. Lang wrote. “In other words, these households are more likely to improve their overall balance sheet when compared with households for which foreclosure timelines are shorter.”
Alas, the benefits often were short-lived. “The results indicate that the foreclosed consumers are less able to stay current on all their credit cards as they have to start making mortgage payments again after the foreclosure ends. … Overall, our results suggest that it is likely that credit card delinquency will rise for individuals after they leave their homes as a result of foreclosure,” the economists wrote.
http://blogs.wsj.com/economics/2014/04/02/some-americans-paid-off-credit-cards-while-waiting-for-foreclosure/?mod=djemRTE_h