The Main Reason for Foreclosure

Real Estate

Many individuals are losing their homes to foreclosure in the United States.
© iStockphoto/Amy Smith

Foreclosure is a process where lenders legally possess a property that a borrower took a loan or mortgage for, and sell it to recover their loss. This process starts when borrowers fail to make their loan or mortgage payment. Owning a home is part of the American Dream, but losing a home is becoming the new American Nightmare.

According to the Mortgage Bankers Association (MBA), the number of foreclosures has reached a record high in the United States. The MBA reported that in 2008, more than 900,000 households were in foreclosure, which is up 71 percent from the previous year and represents more than 2 percent of all mortgages. This is the highest foreclosure rate in the 36 years that the MBA has been tracking delinquent mortgages.

Foreclosure rates are rising for everyone, including subprime and prime mortgages. Subprime mortgages are given to individuals with low credit scores and often come with low introductory interest rates that reset at incredibly high values a few years later. In 2007, subprime and prime mortgages doubled in foreclosures compared to the previous year. Something may be going on besides subprime mortgage rates resetting at sky-high rates. Is it falling home values or a general economic depression?

Although the number one reason for foreclosure varies by state and region, falling home prices are a big factor in foreclosure. In Massachusetts, homeownerships made possible by subprime mortgages ended up in foreclosure almost 20 percent of the time, more than six times as often as loans made with prime mortgage rates. Eliminating subprime lending might go a long way to stemming the tide of foreclosures. This is the federal government’s current approach. In March 2008, U.S. Secretary of the Treasury Henry Paulson unveiled a financial reform plan that would change bank regulation to provide stronger limits on subprime mortgages. The plan calls for a federal oversight committee to monitor mortgage origination in an attempt to prevent people from getting stuck in loans they can’t afford in the first place.

Foreclosure Factors: Subprime Mortgages or Home Values?

Some evidence indicates that falling home prices are a big factor in foreclosure.
© iStockphoto.com/Pete Stopher

According to a study released by the Federal Reserve Bank of Boston in 2007, home values could be a more significant factor in foreclosure than the method of purchasing the home. The study found that homeowners who experienced a loss in home value of 20% or more were 14 times more likely to face foreclosure than those whose home value increased by 20%. The primary cause of foreclosure was not a high reset payment, but the loss of equity in the home. Subprime lending did not necessarily put people in bad mortgages, but it created homeowners who could not bear the value of their homes to fall. The Office of Federal Housing Enterprise Oversight also released a study in 2007 that found a high correlation between falling house prices and rising foreclosure rates. When the property’s value is less than the loan balance, homeowners are more likely to default on their mortgage, indicating that lower prices drive foreclosures. Oversupply of houses on the market due to foreclosures can also lead to lower values, as seen in California, which is currently experiencing a popped housing bubble. The federal government’s plans to tighten subprime lending standards may cause a vicious cycle of falling house prices and foreclosures. If fewer people are approved, fewer homes will be sold, and home values will continue to drop as more foreclosed homes land on the market. Economic factors may also lead to foreclosure in some areas with high foreclosure rates, even if there aren’t many subprime mortgages.

Economic and Personal Causes of Foreclosure

Could losing your job result in losing your house? Midwestern states, such as Ohio and Michigan, have been severely affected by the foreclosure crisis, not due to the high number of subprime mortgages, but because of the significant loss of employment. Over 340,000 jobs in Michigan and 200,000 jobs in Ohio have been cut since 2001. Factors such as economic performance, declining home values, and subprime mortgages are the driving forces behind foreclosures. According to Countrywide Financial, the leading mortgage company in the US, economic performance is one of the primary reasons for foreclosure. In 2007, Countrywide released a report stating that “curtailment of income” was the main factor in about 80% of foreclosure cases. This far outweighed other reasons such as illness or medical reasons (13%), divorce (8%), and an inability to sell the house (6%). Surprisingly, payment adjustment on a mortgage was only given as a reason 1.4% of the time. This rate would be expected to be higher if subprime mortgages with adjustable rates were the main reason for foreclosure. However, Countrywide’s data only goes up until July 2007, so it is possible that the worst of the subprime rate resets were yet to come. Personal problems such as those outlined above will always be one of the traditional reasons for foreclosure, regardless of subprime mortgages and housing values.

The reasons for foreclosure are complex, and there is no one-size-fits-all explanation. Job loss, job transfer or relocation, divorce, and the death of a family member are all factors that can contribute to foreclosure. Losing a source of income can make paying bills difficult. Economic factors such as job growth and unemployment rates can also play a role in why foreclosures occur in certain areas but not others. If someone is asked to move to another state for work, they may not have time to sell their home and could be left with two housing payments. Divorce can be expensive, and it can be difficult for arguing spouses to decide who will make the house payment. In cases where a family member dies, the family may not have other income to pay outstanding debts or two mortgage payments. It’s possible for more than one factor to be at play, leaving homeowners feeling hopeless. Medical bills and subprime mortgages can cause financial strain, and the value of the home may continue to drop. Learning more about foreclosure and how to avoid it is crucial. The article “How Foreclosures Work” and the links provided offer more information.

The sources cited in this article include reports and articles from various organizations and news outlets. These sources cover topics such as subprime mortgages, risky loans, home ownership experiences, foreclosures, financial reform plans, and housing prices. The sources were accessed between November 29, 2007 and April 8, 2008. The cited sources include the Federal Reserve Bank of Boston, USA Today, the Office of Federal Housing Enterprise Oversight, the United States Department of Treasury, the Wall Street Journal, and Bankrate.com.

FAQ

1. What is foreclosure?

Foreclosure is a legal process in which a lender takes possession of a property from a borrower who has stopped making payments on their mortgage or loan.

2. What is the No. 1 reason for foreclosure?

The No. 1 reason for foreclosure is job loss. When a borrower loses their job, they may struggle to keep up with their mortgage payments, leading to foreclosure.

3. Are there other common reasons for foreclosure?

Yes, other common reasons for foreclosure include divorce, medical bills, and unexpected expenses.

4. How can I avoid foreclosure?

You can avoid foreclosure by keeping up with your mortgage payments, communicating with your lender if you’re having trouble making payments, and seeking assistance from a housing counselor or attorney if necessary.

5. What happens if my home is foreclosed?

If your home is foreclosed, you will lose ownership of the property and be forced to move out. The lender will then sell the property to recoup the money they lent you.

6. Can I get my home back after foreclosure?

It is possible to get your home back after foreclosure, but it can be difficult and will depend on the specific circumstances of your case.

7. Will foreclosure affect my credit score?

Yes, foreclosure will have a negative impact on your credit score and can stay on your credit report for up to seven years.

8. Can I still buy a home after foreclosure?

Yes, you can still buy a home after foreclosure, but it may be more difficult and you may have to pay higher interest rates.

9. Can I negotiate with my lender to avoid foreclosure?

Yes, you can negotiate with your lender to avoid foreclosure. They may be willing to work with you to modify your loan or come up with a repayment plan.

10. How long does the foreclosure process take?

The foreclosure process can take several months to a year or more, depending on the state and the circumstances of the case.

11. What is a short sale?

A short sale is when a homeowner sells their home for less than the amount owed on the mortgage, with the lender’s approval. It can be an alternative to foreclosure.

12. Should I hire an attorney if I’m facing foreclosure?

It is recommended that you hire an attorney if you’re facing foreclosure. An attorney can help you understand your rights and options, negotiate with your lender, and represent you in court if necessary.