Feedback    Print    Email
Getting Started Heading
What
Why
How
Who
Why Not
What
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. 
back to the top
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.
back to the top
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.
back to the top
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.
Benedict Commons
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.  

-----------------


[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.

back to the top
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.

back to the top
Why
What are the root causes of this foreclosure crisis?

Although foreclosures are not a new phenomenon, the scope and scale of foreclosure filings in recent years far surpass anything seen before.  Historically, the foreclosure rate has been around 1 percent, but during the crisis that number has risen substantially – often hovering as high as 4 percent or even more (Elmer and Seelig 1998; LPS Mortgage Monitor). The Center for Responsible Lending reports that since 2007, 6.6 million foreclosures have been initiated and up to 12 million more foreclosures are projected through 2015.  A study by the Mortgage Bankers Association indicates that 1 in 9 homeowners is delinquent on their mortgage (Snapshot of a Foreclosure Crisis 2010)

On top of "traditional" causes of foreclosure (job loss,
medical emergencies, and other financial setbacks), several factors have
converged to drive the current crisis.
  • Falling home prices – After many years of strong annual growth, home prices finally began to drop in most markets in 2006 or 2007. To afford the unprecedented housing prices during the boom years, many families took out mortgages there were unaffordable, thinking they could always refinance if they ran into trouble. Once home prices declined, however, many borrowers found themselves "underwater" and unable to sell or refinance their way out of unaffordable loans.
Carlton Court
Photo courtesy of McCormack Baron Salazar
  • Lack of strong economic incentives to provide affordable loans – In many cases, the lenders and brokers who issued mortgages passed them on to wholesalers, who packaged those mortgages into securities that were sold to investors. With little or no stake in the longer term viability of those loans, and the opportunity to earn a commission on each transaction, the lenders and brokers who made the loans lacked a strong financial incentive to ensure that borrowers could actually afford their mortgages.
  • Poor or fraudulent underwriting – Poor underwriting and the risky loans that resulted do not appear to be driven by Community Reinvestment Act (CRA) requirements that financial institutions make loans in communities where they receive deposits. An analysis on loan performance by the Local Initiatives Support Corporation (LISC) suggests that, although a disproportionate share of subprime loans were made to families in high-poverty areas, two-thirds of subprime loans were made in areas where the poverty level was too low to be eligible for CRA credit.  In addition, loans made in high-poverty areas that were eligible for CRA credit performed similarly to the same type of loans made in low-poverty areas.  Click here to read more from the LISC report.  

    Other studies indicate that subprime borrowers often should have qualified for prime loans.  The Wall Street Journal reports that 61 percent of subprime loans originated in 2006 went to borrowers that had credit scores high enough to qualify for conventional loans (2009 Center for Responsible Lending).  Analysis of foreclosure by race and ethnicity suggests that predatory lending practices were targeted to minorities that may have qualified for less risky loans.  Borrowers of color were more likely to receive subprime loans than white borrowers, but within the subprime market, borrowers of color were more likely to receive the most expensive loans associated with increased default risk (2010 Center for Responsible Lending). 
  • Fraud – Lenders were not the only ones guilty of fraud. Some homebuyers falsified their own income on mortgage applications, and some buyers claimed investment properties as their primary residence.
  • Bad decisions by purchasers and investors – While some borrowers affected by the foreclosure crisis were subject to predatory lending or high-pressure sales tactics, others simply made bad decisions. In some cases, homeowners knowingly took on mortgages that exceeded what they could afford or extracted large amounts of home equity, leaving them vulnerable as home prices began to fall. In other cases, investors took on more risk than they could handle, buying up multiple homes with the expectation that they would be easily able to re-sell these properties at a profit.
  • Recession and rising unemployment rates - While it is unclear which factors contributed most to the sharp rise in foreclosures, the combination of unsustainable mortgage products, falling home prices, and a lengthy recession have kept the foreclosure rate at historic highs for several years without yet showing signs of recovery.
back to the top
What are the impacts of foreclosures on communities?

While foreclosures clearly have a devastating effect on the families directly impacted, they also affect the surrounding community, particularly in areas where high rates of foreclosures have occurred. When foreclosed homes remain vacant and are left poorly maintained, they may become targets for vandalism and crime, exposing neighborhood residents to greater risk and causing the value of nearby properties to decline. In places where property values are already falling, even a small number of foreclosures can accelerate the trend. When home values fall, so does property tax revenue – a major source of income for many municipalities. At the same time, cities may be faced with the growing costs of processing foreclosures and securing and maintaining vacant properties, leaving less revenue available for providing other essential services.

Visit the Policy Guide section on Why Foreclosures Matter to learn more.
From the Forum...

Visit the Forum to view online Q&A with the Urban Institute's Tom Kingsley and Robin Smith, authors of a report about the impacts of foreclosures on families and communities.

The HousingPolicy.org Forum is a place to pose questions, exchange ideas, and learn from the experience and expertise of others. This section of the site features interactive forums organized around policy areas, including foreclosure prevention and neighborhood stabilization.

back to the top
Why should state and local governments care?

Foreclosures and mortgage delinquency rates are elevated across most of the country, as the data on metropolitan serious mortgage delinquencies indicates. High volumes of foreclosures don't just affect the families who lose their home, they can have broader "spillover effects" that impact the entire community.  When foreclosed homes remain vacant and are not properly secured and maintained, they may become neighborhood eyesores and targets for vandalism and crime. As nearby property values fall in response, property tax revenue falls as well, creating shortfalls in many city budgets.  At the same time that revenue is decreasing, demands for city services to provide certain services (such as code enforcement, trash removal, and community policing) may be growing.  When foreclosures reach critical levels, municipalities may lack the revenue to provide basic services to all residents.

Visit the Policy Guide section on Why Foreclosures Matter to learn more.
back to the top
Why can't troubled borrowers just refinance?

When housing prices were steadily rising in the first part of the 2000s, borrowers faced with unsustainable mortgage payments could refinance before falling behind and either secure a new loan with better terms or extract equity from the home if payments were temporarily unaffordable.  Today's troubled borrowers, however, will have a significantly harder time refinancing their mortgages, as a result of several related factors:     
  • Home price declines – After years of increasing, home prices finally began to fall in the 2006 to 2007 period, leaving many borrowers "underwater" – i.e., owing more than their homes were worth – and unable to refinance their mortgages.  In 2009, the Wall Street Journal reported that nearly 1 in 4 homeowners currently owe more than the property value (Snapshot of a Foreclosure Crisis).
  • Tightening credit – As the mortgage foreclosure crisis started to unfold, banks and other lending institutions began imposing tighter credit standards on borrowers.  People who would have had no trouble getting a loan several years ago may find themselves getting denied on refinance applications, even if their credit score and income haven’t changed.
  • Declining credit scores – In some cases, homeowners short on cash cannot cover all of their expenses and have to choose each month between paying the mortgage, utility bills, and/or credit card bills.  Falling behind on these payments negatively affects borrowers' credit scores, making it even more difficult for them to secure a loan on favorable terms.
The inability to refinance may be particularly devastating for homeowners who took out adjustable rate mortgages or loans with balloon payments under the assumption that they would be able to refinance later. 
back to the top
Why should we worry about renters in foreclosed homes?

According to the Mortgage Bankers Association, almost 20 percent of all foreclosures involve likely rental properties (one- to four-unit properties that are not owner-occupied) (Brinkmann 2008). A 2009 report from the National Low Income Housing Coalition indicates that around 40 percent of families impacted by foreclosures are renters and rental properties could be involved in approximately half of foreclosures in Nevada, Illinois, and New York (Pelletiere 2009).

Foreclosures on rental properties can cause destabilizing effects on neighborhoods similar to foreclosures of owner-occupied homes. Foreclosed rental properties may remain vacant and fall into disrepair if the new property owners are unable or unwilling to maintain the properties or continue to rent them out. Vacant rental properties can reduce property values of neighboring homes, diminish municipal tax revenues, and contribute to blight and further neighborhood decline.

Even if renters pay their rent on a timely and regular basis, they may have still been at risk of eviction if the house or apartment they are occupying enters foreclosure. In addition to the possibility of eviction, if a lease is terminated due to foreclosure, renters may have difficulty recovering their security deposits. Renters who are evicted may be left with an eviction on their rental record, damaging their credit rating and making it more difficult to get approved for loans or alternate housing in the future.

The Protecting Tenants at Foreclosure Act (PTFA), passed in May 2009, provides significant protections that help to stabilize conditions for renters in foreclosed properties, but these protections currently expire in December 2014.  PTFA requires that renters in good standing receive at least 90 days notice before asked to vacate a foreclosed property, and tenants with a written lease can stay through the remainder of the lease with no change in terms. (Where state laws offer greater protections than those specified in the Act, the state law prevails.)  

Prior to passage of PTFA, the options available to renters for retaining or restoring stable housing varied widely depending on local and state laws governing renters' rights and/or the foreclosure process, and this will be the case again unless the Act becomes permanent.  In some states, for example, a renter could legally receive just three days notice before being ordered to vacate the property, while other states give renters more ample notice, providing more time for a family to secure new housing.

Click here to learn more about protecting renters living in foreclosed homes.

back to the top
Why won't lenders modify more loans to prevent foreclosures?

According the Mortgage Bankers Association, the number of borrowers facing foreclosure continues to outpace loan modifications at a rate of twelve to one (2011 Center for Responsible Lending) even though there are a number of steps that lenders or servicers can take to modify mortgages to help families keep their homes. Among other options, servicers could agree to: temporary suspensions of payments to meet a short-term crisis, reductions in the interest rate of the loan, extensions of the length of the mortgage (e.g., from 30 to 40 years), or the write-off of part of the principal balance of the mortgage. During the early part of the crisis, many loan modifications consisted of modest changes that servicers hoped would be sufficient to help families become stable. Unfortunately,  when these modest changes have not been enough, families have defaulted again. 

Many observers believe that more aggressive loan modifications – including the write-off of principal – are needed to help families avoid foreclosure.   Since foreclosed homes are often sold at a steep discount and can leave lenders or servicers with hefty bills for legal expenses, property maintenance, and sales costs, principal write-downs may help maximize the long-term return to investors. A study comparing foreclosures and mortgage modifications suggests that modifications return more value to investors than allowing the properties to go to foreclosure, even with a high re-default rate (2011 Center for Responsible Lending).  However, there are a number of impediments to substantial loan modifications.

The issue of legal authority is perhaps the biggest factor; loan servicers' right to proceed to foreclosure is clear, yet their authority to agree to principal write-downs in the face of opposition by the investors who own the loans is not. Some lenders are concerned about the threat of litigation from disgruntled investors in mortgage-backed securities, and investors in the riskiest loans have little incentive to agree to principal write-downs as long as they have hope of some recovery. If investors are convinced by research on the higher return provided by loan modifications, worries about legal challenges may diminish.

Another issue that may impact loan modifications is the financial disincentive for servicers who are not compensated for the extra work involved in processing them. In still other cases, servicers may have determined that even an aggressive loan modification may not be sufficient to provide stability to a family whose income is too low or whose property’s value has declined to such a degree that it cannot sustain the modified mortgage.  More aggressive loan modifications have also been hindered by fears that homeowners who are able to pay their mortgage will decide to strategically default in order to reduce their payments.

Plaza East
Photo courtesy of McCormack Baron Salazar
Federal initiatives to increase loan modifications have had limited success to date, in part due to the voluntary nature of the programs and in part due to the severity of the mortgage problems faced by some borrowers.
   
Following a number of other attempts at federal incentives, the Making Home Affordable program was launched in 2009 to increase borrowers' loan modification and refinance options. Programs available under Making Home Affordable include the Home Affordable Modification Program (HAMP) which offers incentives to servicers to make borrowers' mortgage payments affordable through interest rate reductions and other loan modifications.  In addition,
borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac may refinance into a fixed-rate mortgage through the Home Affordable Refinance Program (HARP). Other Making Home Affordable programs offer options for homeowners with income loss, drops in home value, second mortgage problems, and other scenarios that put families at risk of foreclosure.  HAMP has averaged 30,000 permanent loan modifications per month (Treasury 2011), but the process of obtaining a permanent modification has been troublesome for some households.  Overall the program has not led to as many permanent loan modifications as initially hoped.

States and localities have boosted opportunities for loan modifications by bringing borrowers and servicers together through foreclosure mediation programs and borrower outreach events.

Click here to learn more about foreclosure prevention.
back to the top
How
How can we prevent foreclosures?

States and localities have adopted a range of short- and long-term educational, financial, legal, and regulatory policies for preventing foreclosures and protecting affected families and communities. To develop a foreclosure prevention approach that meets local needs and offers a wide range of policy solutions, some communities have brought stakeholders together to form foreclosure prevention task forces that look at options for immediate assistance, post-foreclosure stabilization of families and communities, and ways to reduce the risk of foreclosures in the future. Click here to learn more about developing a coordinated foreclosure response.
A second category of policy interventions involves education and counseling, legal services, and financial assistance to borrowers who are delinquent on their mortgages. Government agencies and their partners have disseminated educational information to residents about mortgage foreclosures through educational workshops, 24-hour hotlines, informational websites or other "one-stop shops" where families are connected to resources to help them stay in their homes.

To expand their reach and provide assistance to the greatest number of families in need, many localities have established partnerships with HUD-certified housing counseling or legal assistance agencies to help families stay in their homes.

Housing counselors typically work with families by laying out the
Fall Creek
Photo Credit Chris Palladino, Courtesy of Mansur Real Estate Services, Inc.
various options available to prevent foreclosure, offering budget advice and assistance, providing information and referrals, and in some cases, helping to negotiate a workout with the lender. Legal assistance can also be a critical resource to help families stay in their homes and prevent financial losses by negotiating alternatives to foreclosure or providing representation for families who have been taken advantage of by predatory lenders. Click here to learn more about efforts to expand the availability of legal services and assistance.

Foreclosure prevention programs increasingly include mediation before a foreclosure can be completed. Foreclosure mediation brings the borrower and the loan servicer in the room together along with an impartial third party to try to come to a settlement agreement. Mediation may be the first time the two parties communicate with each other. Around 75% of cases that go to mediation result in a settlement. Click here to learn more about mediation program.

State or local housing finance agencies can help families avoid foreclosure by offering refinancing products with special loan products and other forms of direct financial assistance. Depending on local needs and resources, foreclosure prevention loans take a variety of different forms that all aim to help families stay in their homes whenever possible. Generally, loans geared toward foreclosure prevention tend to have less restrictive underwriting requirements and/or more suitable loan terms than private-market loans. Unfortunately, budget difficulties in many states have led to cuts in foreclosure prevention loan programs. Government agencies may also provide financial assistance indirectly by negotiating with lenders and servicers to obtain better terms for existing borrowers. The federal Making Home Affordable program offers incentives for servicers to modify loans for homeowners at risk of foreclosure and also includes a refinance program for borrowers with mortgages owned or guaranteed by Fannie Mae or Freddie Mac. Click here to learn more about efforts to obtain better terms for borrowers.

Another set of strategies focuses on reducing the risk of future foreclosures by working to reduce the likelihood that families take out unsustainable mortgages. State governments can strengthen predatory lending laws, regulations, and guidelines to limit excessively high fees and interest rates and other mortgage terms that are clearly exploitative, while allowing responsible uses of subprime lending to continue. Likewise, state authorities can adopt policies that increase oversight of mortgage brokers and originators to create a lending environment that is clear, fair, and consistent.
back to the top
How can communities avoid the negative effects of foreclosures?

Although there is no single right method for avoiding the negative impacts of foreclosures, a coordinated and strategic response can help. A strong plan will include policies for stabilizing neighborhoods affected by foreclosures as well as policies that can help prevent large numbers of foreclosures in the first place. States, metropolitan regions, and localities can work together to create a comprehensive approach that includes providing meaningful homeownership counseling, reducing risky mortgages, preventing foreclosures, and reusing vacant foreclosed homes as quickly and intelligently as possible. To learn more, visit the Policy Guide section on developing a coordinated response strategy.

From the Forum...

How are regions across the country responding to the mortgage foreclosure crisis? View online Q&A with Todd Swanstrom, Karen Chapple, and Dan Immergluck, authors of the report Regional Resilience in the Face of Foreclosures: Evidence from Six Metropolitan Areas. In the report, the authors look at foreclosure prevention and response in a variety of markets and metro areas - including Cleveland, OH; St. Louis, MO; Chicago, IL; the Inland Empire of Riverside and San Bernardino, CA; and the East Bay area of Alameda and Contra Costa Counties, CA - and present keys to stronger efforts.

Learn more on the HousingPolicy.org Forum.
back to the top
How do we prioritize neighborhoods to target for assistance?

Communities face difficult decisions when prioritizing neighborhoods for stabilization. It is better to stabilize a few neighborhoods successfully than to spread the limited resources so thinly that no neighborhood's situation improves. To prevent foreclosures from destabilizing sound neighborhoods and to revive those already in decline, communities will need to invest time and resources in those neighborhoods where the investments will have the most significant payoff. Communities should resist the urge to spread assistance thin in the hopes that everyone will get at least a little benefit. This approach does not stabilize neighborhoods and may just lead rehabbed properties to go into disrepair again quickly due to the impacts of other distressed properties in the area.

When prioritizing neighborhoods for stabilization, it may make sense to start with a fairly straightforward framework that classifies neighborhoods by housing market strength and the risk of being impacted by foreclosures (see table below). This will help communities tailor strategies appropriately and make informed choices about how to target scarce resources. The table includes direct links to information on policies that can help in different neighborhood situations.

For guidance and data tools that can help you apply this matrix to neighborhood stabilization planning in your metropolitan area, see the Setting Neighborhood Priorities page of the Maps and Data section.

MARKET STRENGTH
FORECLOSURE IMPACT RISK
C. Actual high foreclosure density
B. High risk of high foreclosure density
A. Low risk of high foreclosure density
1. Strong
Facilitate rapid sales to sustainable owners, low/no subsidy
Lower cost effort to prevent foreclosures and vacancies, low/no subsidy
Lower priority
2. Intermediate
High payoff/priority, rehab and rapid sale to sustainable owners, target subsidies, neighborhood maintenanceHigh payoff/priority, prevent foreclosures and vacancies, emphasize neighborhood maintenance
Lower priority but watch carefully, head-off emerging problems early
3. Weak
More emphasis on securing/demolishing, land bankingLower cost effort to prevent foreclosures and vacancies
Lower priority but watch carefully, head-off emerging problems early

Source: Developed by the Urban Institute for the Open Society Institute

Data can help you assess neighborhood needs and make an informed decision about targeting your limited stabilization assistance, but looking at data is just part of the toolbox for setting priorities. After understanding neighborhood conditions, there is still the critical question of which types of neighborhoods to target -- those with the greatest need or those that can be stabilized with just a little assistance? The answer depends on your community's goals and the resources you have available. To learn more, see the Policy Guide section on Developing a Local Action Strategy.
back to the top
How can we use data to target our response to foreclosures?

Data can help your community choose policies that fit local needs by answering questions such as "What neighborhoods have high foreclosure needs?" and "What are the housing market conditions in our high-foreclosure neighborhoods?"  By understanding your local housing market and where your community's foreclosures and vacancies are concentrated, you can make informed decisions about targeting foreclosure prevention resources, investing public resources in the acquisition and rehabilitation of foreclosed properties, holding properties in a land bank for future development, or opting to demolish properties and finding new uses for the land.

The ideal data for answering questions about foreclosures would be generated by analyzing foreclosure filings, property tax delinquencies, and other local data sources. Where available, communities will want to tap those resources first.  Valuable data also can be obtained from national vendors who specialize in information on mortgage delinquencies and foreclosures. 

The data on Foreclosure-Response.org also provide a useful starting point for identifying the areas in need of priority attention within your community.  The data available can help communities identify: (1)  where foreclosures are likely to be concentrated,  (2)  demand in the local housing market, (3) the combined housing market strength and foreclosure risk levels in particular neighborhoods, and (4) serious mortgage delinquency rates and trends in a metropolitan area.
back to the top
How can we help renters affected by foreclosure?

The Protecting Tenants at Foreclosure Act, which was signed into law on May 20, 2009, provides significant protections for tenants in foreclosed properties. Most importantly, the Act requires
90 days notice before an eviction. In many communities, tenants have little or no warning that their rental property is going into foreclosure until they are notified of eviction. Prior to passage of the Act, they might have been required to vacate the property within just a few days, making it difficult to find new housing. Local and state governments can adopt or expand laws to provide additional protections for renters; where more protective state and local laws exist, they take precedence over the federal law.

In addition, there are three main legal exceptions protecting 		From the Forum...

Learn more about the Protecting Tenants at Foreclosure Act on the HousingPolicy.org Forum, where you can listen to a presentation and view Q&A about the Act by Catherine Bendor of the National Law Center on Homelessness and Poverty, Danna Fischer of the National Low Income Housing Coalition, and David Rammler of the National Housing Law Project.
renters in the case of foreclosure. The first two exceptions are for
recipients of Section 8 vouchers and tenants living in rent-controlled units, who are able to maintain their leases after foreclosure by law. The third exception is for tenants renting in cities and states that require "just cause" as a condition for eviction. For example, New York, New Jersey, and New Hampshire, and a number of cities require "just cause" as a condition for eviction. "Just cause" laws protect renters by ensuring that landlords can only evict with proper cause, such as not paying rent on time. In general, foreclosure does not count as a cause for eviction in these locations.

A renter evicted as a result of foreclosure may have a damaged credit rating and face difficulties qualifying for a new rental property or mortgage. A few states and localities have adopted policies to ensure that foreclosures do not harm renters' future housing options. In Minnesota and Illinois, state legislators have passed laws to remove foreclosure-related evictions from renters' rental records so they are not left at a significant disadvantage when seeking future rental housing or to qualify for a mortgage. Other local governments are partnering with non-profit organizations to provide assistance to families to help cover first month’s rent, security deposits, or moving costs in the case they are evicted from a rental property.

Click here to learn more about ways to protect tenants of foreclosed properties.
back to the top
Who
Who is most at risk of foreclosure?

Foreclosures affect homeowners at all income levels and in all types of homes. The latest wave of foreclosures is mainly due to income loss from unemployment rather than any inherent riskiness in borrowers' mortgages.  However, borrowers who took out high-risk loans, including high-priced subprime loans adjustable rate loans with very low teaser rates, may be more vulnerable to foreclosure than others. These households do not fit a single profile but research suggests that racial minorities have been disproportionately affected (2010 Center for Responsible Lending).

Visit the Maps and Data section of this site to learn more about the communities in which high-risk lending has been most concentrated.
back to the top
Who are the key players in responding to foreclosures?

Lenders and loan servicers; federal, state, and municipal governments; non-profit organizations; and others all have roles to play in preventing foreclosures and stabilizing communities.

  • Lenders and loan servicers can help by proactively reaching out to borrowers in distress or potential distress and by offering aggressive loan modifications to help families stay in their homes.
  • Federal government agencies set regulatory policies to make the mortgage market work better in the future or encourage loan modifications. The federal government allocates funding for states to administer foreclosure prevention and neighborhood stabilization efforts and the guidelines for how those resources can be spent, such as the Neighborhood Stabilization Program (NSP) and the Hardest Hit Fund.  The federal Making Home Affordable program, launched in 2009, provides refinance and loan modification programs such as the Home Affordable Refinance Program (available only to borrowers with mortgages owned or guaranteed by Fannie Mae or Freddie Mac) and the Home Affordable Modification Program.
  • States and localities may provide financial assistance to distressed borrowers, create opportunities for borrowers and loan servicers to communicate about foreclosure prevention options through outreach events and mediation programs, or convene stakeholders to form a foreclosure prevention task force that helps lead and coordinate foreclosure prevention and neighborhood stabilization activities.
  • Non-profit housing counseling agencies may negotiate a loan workout on behalf of a troubled homeowner directly with the servicer and may refer borrowers to legal services if needed. With governmental support, non-profit legal service agencies can train pro bono lawyers in local foreclosure laws and increase their capacity to respond to a growing number of foreclosure cases.
Hismen Hin-Nu
Image courtesy of the Board of Trustees of the University of Illinois, (c) 2001
  • Philanthropic foundations have the capacity to provide vital resources to non-profit organizations' foreclosure prevention outreach and assistance activities. Foundation support may enable non-profits to hire more staff, avoid service reductions due to funding cuts, or fund innovative programs that help families stay in their homes.
  • Community-based organizations, such as CDCs and neighborhood associations can engage and education local residents through outreach activities on the risk of foreclosure and provide or refer homeowners to housing counseling services. Community-based organizations have the ability to concentrate efforts in areas with high foreclosure risk and work directly with families that might need assistance.
Click here to learn about bringing these parties together to develop a coordinated response to foreclosures.
back to the top
Who is responsible for maintaining foreclosed properties?

In general, maintaining properties is the responsibility of the property owner. After a foreclosure, the owner is the lender or servicer that holds the property in its REO portfolio. The lender or servicer, often an entity located far from the property itself, may be required to assign and list a local agent who can be contacted quickly to respond to a property's maintenance needs. After a foreclosure proceeding has commenced, but before it has been finalized, however, responsibility for maintenance can be tricky.  The homeowner may retain responsibility up until the foreclosure is finalized, but he or she has little incentive to put time and effort into a property that the bank may soon own. In order to reduce neglect during the foreclosure process, some communities have clarified that the lender or servicer is responsible for maintaining any property that is vacant and in the process of being foreclosed upon.  To learn more, see the policy guide section on securing and maintaining vacant properties.
back to the top
Why Not
Why should the government help borrowers who took out risky loans?

Government intervention to prevent foreclosures does more than assist the borrowers of risky loans. The negative consequences of home foreclosures spill over to entire communities and impose substantial external costs on municipalities, neighborhoods, and property owners. For example, homes left vacant or abandoned after foreclosure may lead to neighborhood distress and a decline in surrounding property values. A study by the Center for Responsible Lending calculates that foreclosures between 2009 and 2012 will strip neighboring homes of approximately $1.9 trillion (2009 Center for Responsible Lending).  Government efforts to address foreclosures can help stabilize communities, safeguard local property tax rolls, and protect homeowners from equity loss. 

While some families may have knowingly taken out a home loan they couldn't afford, others were largely the victim of high-pressure sales tactics and confusing and unfair loan terms.  A study by the Center for Community Capital found that low-income borrowers were able to make mortgage payments when offered loans with terms that were more reasonable than those offered by high-priced subprime mortgages (Quercia Stegman Davis 2005). 

In addition, the latest wave of foreclosures is mainly due to income loss from unemployment rather than any inherent riskiness in borrowers' mortgages. Government efforts can help vulnerable families stay in their homes and retain their equity, as well as prevent widespread losses in low- and moderate-income homeownership.

Click here to learn more about the ways in which foreclosures can impact families and communities.

back to the top
Aren't most mortgage problems so bad that foreclosure is the only option?

No. There are numerous examples of families who have successfully avoided foreclosure with the proper assistance. Automatic mediation programs, for example, have been particularly effective – in some cases allowing more than half of borrowers to remain in their homes (Jakabovics and Cohen 2009).  Mortgage delinquencies due to unemployment or other temporary setbacks can be resolved through emergency loan programs that cover mortgage expenses for a limited time to allow the household to regain its financial footing.
   
Families can also work with housing counselors to learn about a wide range of alternatives to foreclosure and get help negotiating with their lender to get a loan modification. Loan workouts or loan modifications change the terms of a mortgage payment to make them more affordable to the borrower. Loan modifications can be helpful for many families, but lenders do not always make loan modifications that will be affordable for borrowers over the long-term, creating the risk that a family can re-default on a modified mortgage.

The Making Home Affordable program, provides a set of products to help with various types of mortgage difficulties, including the Home Affordable Modification Program (HAMP) that offers incentives to lenders or servicers to reduce mortgage payments and the Home Affordable Refinance Program (HARP) that allows some homeowners to reduce their payments by accessing lower interest rates.  
As of the end of June 2011, more than 760,000 permanent loan modifications had been initiated, and the median monthly mortgage payment post-modification was 37 percent less than the median per-modification payment (Treasury 2009). Visit MakingHomeAffordable.gov for more information on the program.


Federal programs also exist to help homeowners at risk of foreclosure because of temporary financial setbacks, such as job loss, a medical condition, or other unforeseeable event.  The Hardest Hit Fund, established in 2010, provides funding to Housing Finance Agencies in states with high unemployment rates or substantial reductions in home values for foreclosure prevention programs. A similar initiative from HUD, the Emergency Homeowners Loan Program (EHLP), provides funding to states that did not receive Hardest Hit money.  ELHP provides forgivable loans of up to $50,000 over a two year period to homeowners at risk of foreclosure due to unemployment.  Click here to learn more about EHLP.

It is important to note that even if a family cannot obtain a sufficient loan modification to afford its mortgage, the family still has options for avoiding foreclosure, including deeds-in-lieu of foreclosure and short sales. A deed-in-lieu of foreclosure refers to a situation in which a borrower is unable to pay his or her mortgage and voluntarily hands over the property to the lender. Short sales are an approach where a borrower avoids foreclosure by selling the home at a value less than the outstanding mortgage balance. The lender agrees to take that loss and collects all the proceeds from the sale.

Borrowers who cannot avoid losing the home may prefer these options,
From the Forum...

Learn about automatic (also known as “mandatory”) mediation programs, which have been adopted in many communities to bring together servicers and borrowers in an effort to explore settlement options and avoid foreclosure.

Click here to listen to a presentation on mandatory mediation featuring Alon Cohen and Andrew Jakabovics of the Center for American Progress and to view online Q&A with the speakers.
sometimes referred to as "graceful exits," since short sales and deeds-in-lieu are less damaging to their credit rating than foreclosure. Additionally, once the transaction is complete, the borrower is relieved of the loan debt. Lenders may enter into an agreement with the borrower to pursue a deed-in-lieu or short sale because the process is shorter and less costly for them than proceeding with a foreclosure.
back to the top