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1.4.3 Foreclosure Rates

The rate at which loans go into foreclosure is significantly higher in the subprime market than in the prime market. As of the fourth quarter of 2014, 17.68% of subprime mortgage loans—more than one of every five loans—were in foreclosure.76 This stands in stark contrast to the rate for prime loans, 2.6%, during the same period.77 In some metropolitan areas, the subprime foreclosure rate approached 40% even after the foreclosure crisis began to recede.78 Nationally, from 1998 to 2007, the percentage of prime loans in foreclosure was consistently about 0.5%, while the percentage of subprime loans in foreclosure ranged from 3.5% to over 9%.79

When foreclosures occur, families are evicted, neighborhoods suffer, and tax bases decline. The homeowner not only loses stable housing and a major wealth-building asset, but also suffers a reduced credit rating that will make it harder to buy or even rent a home in the future. In addition, the average foreclosure results in at least $7200 in administrative charges to the borrower.80 A city can lose up to almost $20,000 in lost property taxes, unpaid utility bills, property upkeep, sewage, and maintenance for each house abandoned in foreclosure.81 Neighbors also bear the costs of foreclosure: a single-family home foreclosure lowers the value of homes located within one-eighth of a mile by an average of almost one percent.82

It is important to note that high foreclosure numbers occur even when the economy is booming. When a downturn befalls us, such as the recession that began in December 2007, the devastation can skyrocket.83 The advent of new mortgage products, combined with the collapse of the housing market and the lending industry’s subsequent tightening of mortgage credit, caused dramatic increases in foreclosures and delinquencies.84

Footnotes

  • 76 {76} Mortgage Bankers Ass’n, National Delinquency Survey 4–5 (Fourth Quarter 2014).

  • 77 {77} Id.

  • 78 {78} Urban Institute, Top 25 Metropolitan Areas By Foreclosure Rate (2012).

  • 79 {79} Mortgage Bankers Association, National Delinquency Survey 3 (Fourth Quarter 2006). See also Daniel Immergluck and Geoff Smith, Woodstock Institute, Risky Business—An Econometric Analysis of the Relationship Between Subprime Lending and Neighborhood Foreclosures 17, 23 (2004). See also Debbie Gruenstein & Christopher E. Herbert, ABT Assoc., Inc., Analyzing Trends in Subprime Organizations and Foreclosures: A Case Study of the Boston Metro Area, at i (2000) (found that the volume of foreclosures started by subprime lenders in the Boston area grew by 154% during 1995–1999 while the overall volume of foreclosures dropped by 30%).

  • 80 {80} U.S. Senate, Joint Economic Committee, Sheltering Neighborhoods from the Subprime Foreclosure Storm 14 (Apr. 11, 2007), available at http.://jec.senate.gov/reports.htm.

  • 81 {81} Id. at 15.

  • 82 {82} Id.

  • 83 {83} Floyd Norris, Recession, Far From Over, Already Setting Records, N.Y. Times, Apr. 25, 2009, at B3 (correction available at www.nytimes.com/2009/04/25/business/economy/25charts.html); Center for Responsible Lending, Soaring Spillover (May 2009), available at www.responsiblelending.org (predicting foreclosures will cost neighbors $509 billion in 2009).

  • 84 {84} In the last quarter of 2011, 4.35% of all loans were in foreclosure compared to 1.19% at the same time in 2006. By the end of 2011, the number of subprime loans in foreclosure had increased from 4.53% in 2006 to 14.45%. Prime loan foreclosures increased from 0.5% to 3,28% over the same period. Mortgage Bankers Ass’n, National Delinquency Survey 3 (Fourth Quarter 2006); Mortgage Bankers Ass’n, National Delinquency Survey 3 (Fourth Quarter 2011).