Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jan 6, 2012

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As houses dropped underwater and home loans flipped upside-down, property owners across the nation looked at their financial obligations and wondered how on Earth they would sustain them. Then, as the job market dropped to its knees and fell in line with the real estate world, the nation as a whole felt the eerie weight of economic collapse hovering over their shoulders. Many were forced to default on their home loans, while others decided to default intentionally, believing it made the most financial sense for themselves and their families.


Despite the reasoning behind a default, lenders were quick to denounce such actions as immoral when they began to see their own profit margins fall. As mass strategic default was looking more and more eminent, the government mortgage-security agencies, Fannie Mae and Freddie Mac, sprung to action. They announced that defaulters would not only see a huge hit to their credit scores, but that they would be barred from receiving a government-backed mortgage loan for seven full years—essentially condemning defaulters to nearly a decade of renting.


Media sources also propelled this notion of the “immoral defaulter,” denouncing delinquent loan holders as irresponsible and reprehensible.


An Unlikely Default Defender


But from amongst the shadows has emerged a defaulter defender that nobody foresaw: another lender.


In a nation where mortgage loan delinquencies and foreclosures are often hailed as negative, auto loan lenders are trying to separate themselves from any sort of denunciation, and instead are inviting those with black marks on their financial history to obtain a car loan.


Such a move may sound like poor business practice, since mortgage delinquencies have historically been seen by lenders as early warning signs. When a person defaults on one of their three basic survival needs—food, water, and shelter—an auto loan lender usually saw trouble on the horizon in regards to receiving timely payments. But in light of the economic trends and the reasons behind many of the nation’s foreclosures, this decision may prove to be more genius than many believe.


In the third quarter of 2011, lenders issued 205,000 auto loans to borrowers who had a foreclosure on their record or who were currently at least 60 days past due on their mortgage.


“If everything on the credit is perfect, spotless, other than the foreclosure, we’re open to that,” say Vijay Patil, the director of credit risk at Mitsubishi Motors Credit of America, according to the Wall Street Journal.


Lenders like those at Mitsubishi Motors recognize that a foreclosure doesn’t always mean what it used to. Now, foreclosures don’t necessarily label a borrower as a poor candidate. Rather, foreclosures may even hint at the fact that some borrowers are financially prudent—as they were likely looking to retain as much money as possible by walking away from their property.


Others are Joining in the Trend Too


Aside from auto loan lenders, other financing operators are joining in the trend of not treating a foreclosure as a negative mark.


Credit card companies are beginning to relax their approval standards as the Wall Street Journal reported the number of credit cards issued to borrowers with poor mortgage history increased by 36 percent between 2007 and 2011—the height of the housing market collapse.


Credit experts say the reason why auto loan lenders and credit card companies are able to make a move such as this is because when borrowers default on their home loans, they wind up with a surplus of cash on hand. They no longer are required to devote a substantial portion of their income to their house, so they redirect it to their other debts.


Subsequently, car loans and credit cards receive borrowers’ financial attention, and those loans’ lenders prosper as a result. To cater to this prosperity, auto loan lenders are now reaching out to home loan defaulters, and awarding them with financing options.