In a quantitative study published in the Journal of Consumer Policy, doctoral candidate in sociology of law Mikael Lundholm found that “higher socio-economic status is positively correlated with greater potential for compensation” during a foreclosure. He also concludes that this correlation is not due to appraiser bias, as the ratios between a property’s price and its market value are largely unaffected by the borrower’s socio-economic status.
Apart from excluding appraiser bias, Lundholm’s data cannot explain why there are variations in compensation correlated with social-economic status. Lundholm notes that they could be due to high-status borrowers making better deals, or maintaining their properties better. Economic trends, such as stagnant house prices in areas with specific socio-economic profiles, could also play in. Lundholm concludes that more research is needed about the drivers of the observed socio-economic differences.
Lundholm argues that there has been a trend toward protecting mortgage borrowers as consumers when they get the loan, but that this protection is significantly weaker when the borrower faces foreclosure. He suggests implementing a variety of consumer safety nets that are relevant also during foreclosure. This includes developing alternative mortgage products and utilizing debt relief to make up for low compensation during foreclosure for socio-economically weak groups of borrowers. According to Lundholm, such safety nets may help to remedy the situation by redistributing risk between the lender, the borrower, and other stakeholders.
The study is based on case-level data on foreclosure auctions between 2000 and 2014 from the Swedish Enforcement Authority (Kronofogden).
Visit Mikael Lundholm’s personal page to read more about his research.
