Allowing borrowers with negative credit histories to erase mortgage defaults from their credit reports within three years may improve access to credit, a new report from the Federal Reserve Bank of Philadelphia suggests.
Apparently, the quick removal of a bad credit mark doesn't necessarily mean the borrower will quickly default again.
The study noted that the law in Sweden allows for the removal of a negative credit items within three years, whereas American law requires a 7-year-run before a person's negative credit items can be expunged.
Yet, Leonard Nakamura, vice president and chief economist for the Philadelphia Fed Bank, and co-author Marieke Bos released a report saying: "We use a sharp discontinuity approach and find that the removal induces an abrupt improvement in the individuals credit score that is not reversed in the longer run."
The research concluded that 18 months after a credit mark removal, a person's credit score generally remains improved and does not deteriorate significantly over the subsequent four-year period.
The report says in many situations negative credit items do not reflect consistent negative borrowing behavior, but rather one-time instances that taint reports for a brief period of time.
Click here to read the full report.