Foreclosure-Response.org | Getting Started

What is a "foreclosure," a "mortgage delinquency," a “serious delinquency,” and a "default"?

Foreclosures, mortgage delinquencies, and defaults refer to different levels of financial difficulty with a mortgage. A foreclosure is the final point of financial distress with paying a mortgage. It occurs when a property owner has not paid the mortgage for a long enough period of time that the lender or loan servicer has filed for and received the right to seize the mortgaged property in order to satisfy the loan. A mortgage delinquency, on the other end of the spectrum of financial distress, may mean that a mortgage payment is just a few days late. Often mortgage delinquencies are divided into categories by the number of days late (30 to 59 days, 60 to 89 days, and 90 or more days late). The longer a mortgage is delinquent, the harder it usually is to find a way to prevent foreclosure. Loans that are in foreclosure (i.e. foreclosure has been filed but not yet finalized) and loans that are 90 or more days delinquent are often considered together as "serious delinquencies." The combination of these two categories reflects loans that are unlikely to become current again. Default means that a mortgage delinquency has continued for at least 30 days and is often used to refer to more severely delinquent loans that will soon be entering the foreclosure process.

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What is "real-estate owned" or REO property?

Real-estate owned or REO property refers to property that has gone through the foreclosure process and is now owned by a bank or other loan servicer as part of its real estate portfolio. When a borrower avoids foreclosure by moving out and turning over the property’s deed to the bank or loan servicer (a process known as a "deed in lieu"), the property also becomes part of the servicer's REO inventory. REO property is often synonymous with vacant, foreclosed homes, particularly ones that are challenging to market for re-sale.

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What are "judicial" and "non-judicial" foreclosures?

Judicial foreclosures are conducted through a court hearing, while non-judicial foreclosures are conducted by following established procedures of posting notices and holding a public auction. The level of review required to complete a judicial foreclosure allows a property to exit the foreclosure process with no outstanding claims on its title – making the property substantially more attractive for re-sale.

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What types of loans are most at risk of foreclosure?

While any mortgage can become unaffordable when a borrower's financial condition changes, certain types of loans may be more vulnerable to foreclosure than others.

High-priced subprime loans – The Center for Responsible Lending reports that over 1.5 million homes have been lost to foreclosure due to subprime loans and another 2 million subprime loans are more than 60 days’ delinquent and at risk of foreclosure (Center for Responsible Lending 2009). Subprime loans are generally issued to borrowers who have lower incomes and/or damaged credit, and carry higher-than-average interest rates to compensate for that extra risk, but many subprime loans went to borrowers who should have qualified for better terms (Brooks and Simon 2007). In some cases, subprime mortgages may be unaffordable from the outset, leaving families vulnerable to foreclosure even if their incomes stay steady. In other cases, subprime borrowers who suffer a financial setback may have trouble keeping up with the higher payments. Click here to read an analysis of loan performance problems by subprime status.

Photo courtesy of Jonathan Rose Companies

Adjustable Rate Mortgages and Other Non-Traditional Loans–Some types of mortgage terms, such as negative amortization, balloon payments, no-documentation, low-documentation, and adjustable interest rates [see note 1], have been linked with an increased risk of foreclosure (U.S. Department of Housing and Urban Development 2009). No-downpayment loans or other loans with a high loan-to-value (LTV) ratio can also pose risks in the event that home prices decline or the family experiences major repair bills that homeowners might otherwise pay for by tapping their equity.

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[1] Adjustable rate mortgages offer borrowers very low "teaser" interest rates for an introductory period that may be as short as the first 2 or 3 years of the mortgage term. After the introductory period, interest rates reset to a much higher level – typically market-rate plus 2 or more points – causing sometimes significant increases in borrowers' payments.

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What is the Neighborhood Stabilization Program?

The Neighborhood Stabilization Program (NSP) is a federal program designed to help states and localities stabilize neighborhoods affected by large numbers of foreclosures. The program, which is administered by the Department of Housing and Urban Development (HUD), makes available grant funds to achieve this objective in four funding pools, known as NSP1, NSP2, NSP3 and NSP-TA. NSP1 and NSP3 funds were distributed by formula to states as local jurisdictions to address the impacts of high numbers of foreclosures. NSP2 and NSP-TA were competitive grant processes.

Some core components of the NSP include:

Geographic targeting – NSP assistance is to be targeted to local ares with the greatest need (i.e., areas with the greatest percentage of home foreclosures, homes financed by a subprime mortgage, and/or identified as being at high-risk of an increase in the rate of home foreclosures).

Income targeting – All activities supported by NSP grants must benefit individuals with incomes at or below 120 percent of the area median income (AMI), and fully 25 percent of funds must be applied to activities benefiting individuals with incomes at or below 50 percent of AMI.

Eligible activities – Eligible uses for NSP funds include: (A) Establishment of financing mechanisms for the purchase and redevelopment of foreclosed homes; (B) Acquisition and rehabilitation of foreclosed properties for resale, rent, or redevelopment (including homeownership assistance and housing counseling for prospective buyers); (C) Creation of land banks; (D) Demolition of blighted structures; and (E) Redevelopment of vacant or demolished properties. These are often referred to by letter, for example "Eligible Use A" refers to using NSP funding for financing mechanisms.

For more information, visit HUD's Neighborhood Stabilization Resource Exchange website or the NSP Resource Center on Foreclosure-Response.org.

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