It is commonly understood that the seven million foreclosures that occurred between 2004 and 2015 fueled the Great Recession and have held back a robust economic recovery. But the role of adverse public records during that same period is just as significant yet rarely discussed.
Nearly 35 million consumers had adverse public records between 2004 and 2015, including bankruptcies, civil judgments, and federal tax liens. Combined with the seven million foreclosures, this means more than one in six Americans with a credit record suffered an adverse event during this period.
These extensive credit problems are partly responsible for consumers’ slow recovery from the financial crisis. The lingering effects of foreclosures and adverse public records prevent consumers from obtaining mortgages and pursuing homeownership, hinder housing market recovery, limit consumers’ ability to obtain other credit (e.g., auto loans), and reduce consumers’ ability and willingness to spend, all of which weakens the economic recovery.
In our examination of a 2 percent random sample of the 264 million American consumers with credit records between 2001 and 2015, we discovered six facts policymakers need to understand to better craft policies that will strength the economic recovery:
- Sixteen percent of consumers with credit records acquired a blemish on their record between 2004 and 2015. From 2004 through 2015, 7.1 million borrowers experienced a foreclosure filing, and 34.4 million consumers acquired an adverse public record other than foreclosure. Altogether, 41.5 million consumers, or 16 percent of the 264 million US consumers with credit records, experienced one of these adverse events.
- These credit blemishes will persist for many years. While it is commonly understood that the Great Recession ended in 2009, the total number of consumers with blemishes on their credit report actually peaked in 2015. Accordingly, many consumers will retain adverse events on their records for years, making it hard for many of them to borrow again. We estimate that in 2018, 22.8 million consumers—almost 9 percent of the adult consumer population—will still have a foreclosure or adverse public record.
- Most consumers with blemishes on their credit still had low credit scores in 2015. Of the 7.1 million consumers who experienced a foreclosure between 2004 and 2015, 3.9 million (54 percent) of them still had a VantageScore credit score below 620 in 2015. Of the 34.4 million consumers with negative public records and no foreclosure, 22.1 million (64 percent) still had VantageScore credit scores below 620 in 2015.
- Consumers ages 29 to 59 were hit hardest by these credit blemishes. Seventy-three percent of consumers who experienced a foreclosure or other adverse public record were between 29 and 59 years old in 2015, but this age group accounts for only 53 percent of adult consumers. The homeownership rate is down sharply among this age group, and the hit from these adverse credit events accounts for much of this drop.
- The concentration of these credit blemishes varies widely by region. Nevada tops the list for foreclosures: 5.2 percent of its adult consumer population has experienced one. At 28.7 percent, Indiana has the highest share of consumers with a foreclosure or negative public record.
- Long judicial foreclosures may have extended foreclosure’s negative impact. The long judicial foreclosure process in some states might have contributed to the extended impact of foreclosures on consumers. The foreclosure surge caused filing bottlenecks that have not evaporated.
The widespread damage to consumer credit records beyond mortgage foreclosures during the 2008 financial crisis has had a more significant and lasting impact than many have recognized. Policymakers need to take this damage into account as they design ways to energize the recovery.