Root Causes: Home Foreclosures

Why is this Trend Important?

• Over 2 million home mortgage foreclosures were initiated in 2008,[i] and almost 800,000 more were initiated in the first third of 2009.[ii]  By 2012, an estimated  8 million or more foreclosures could result from the current crisis.[iii]

• Children suffer when their family faces an economic crisis and home loss. Research indicates that children who face home loss are more likely to move from school to school.  This school mobility is associated with poor educational outcomes and behavioral problems, and family economic stress is associated with poor health outcomes for children.[iv]

• Educational achievement.  According to the National Assessment of Educational Progress, students with two or more school changes in the previous year are half as likely to be proficient in reading as their school mates.[v] 

• Behavior.   Children who change schools frequently are 77% more likely to have behavior problems than children who do not move frequently.[vi]

• Health.  Families who are in housing crisis often spend a significant portion of their income on housing, thus making spending on adequate food and health care services or health insurance difficult.[vii]

• The entire community is impacted. A foreclosed home does not only impact an individual family, it also negatively impacts the other houses and families in the neighborhood though increased crime, lack of funding for public services, and devaluation of property.[viii]  The impacts of these foreclosures can be especially challenging in minority communities.[ix]

What are the Forces and Influences at Work?

Many factors have shaped the recent mortgage foreclosure crisis, including: 

• Nontraditional mortgage products.  Interest only loans, deferred interest loans, adjustable rate mortgages and loans with balloon payments were created to allow borrowers to make smaller premium payments, and secure larger loans, but may not have predictable premium levels or payments may grow dramatically. [x]
• Predatory lending practices.   Predatory mortgage lenders take advantage of uninformed borrowers or those with limited credit histories by using unfair lending practices such as negative amortization and prepayment penalties.  These practices can strip a family’s hard-earned home equity, and also can lead to mortgage foreclosure.  In recent years leading up to 2008, predatory mortgage lenders cost America’s families an estimated $9.1 billion annually.[xi]
• Housing speculation —quickly rising home prices in the 2000s led homebuyers and financial markets to overvalue housing and overextend credit based on inflated home values.  When home prices dropped, homeowners and business were left with the loss. [xii]
• Economic downturn.  Homeowners who face job loss or other financial insecurity may simply be not able to make home mortgage payments. [xiii]