Reflections on the Foreclosure Crisis

Until recently, a foreclosure on an owner‐occupied home in the United States was a relatively rare event. According to data from the Mortgage Bankers Association (MBA), foreclosure proceedings were initiated on approximately 0.3 percent of all owner‐occupied housing units with a mortgage in each quarter from 1979:Q1 through 2006:Q2 (figure 1). Since mid‐year 2006, foreclosure proceedings have more than tripled and now occur at the rate of at least 1 percent per quarter. To place these percentages in context, in the 27 1/2 year period between 1979 and mid‐2006, a cumulative total of 7.5 million foreclosure proceedings had been initiated at a rate of 275,000 per year. In the 3 1/2 year period between mid‐2006 and year‐end 2009, 6 million foreclosure proceedings had been initiated, at a rate of 1.7 million per year, a more than 6‐fold increase. The conditions for high foreclosure rates are in place for at least the next two years, suggesting that another 4 to 5 million owner‐occupied homes will enter into foreclosure in 2010 and 2011. What is a Foreclosure? A house is seized by a mortgage lender in a foreclosure proceeding after three steps have occurred. First, the homeowner fails to make contractually obligated mortgage payments, a condition commonly known as default. If homeowners fail to make one or two monthly payments, they are known as 30 ‐ and 60‐days delinquent, respectively. In many of these cases, the homeowner “self‐cures ” by making the missed payment(s) in full and paying an additional (contractually pre‐specified) penalty. Once a homeowner misses three consecutive monthly payments, the homeowner is known as 90‐days delinquent and the probability increases that the house will end up in foreclosure (Tanta 2007). In the second step, the lender initiates foreclosure proceedings. This process varies by state and can take between 6 and 18 months to complete. In the third and final step, the court system assigns the ownership of the house back to the mortgage lender. In some states, after a foreclosure occurs lenders may try to obtain a “deficiency judgment, ” which implies that the foreclosed homeowner must compensate the lender in an amount equal to the difference between the value of the house after the foreclosure and the outstanding loan balance of the mortgage (Ghent and Kudlyak 2009).

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