Executive Summary

This study of the root causes of the current extremely high levels of defaults and foreclosures among residential mortgages represents the final report to Congress by the Secretary of the Department of Housing and Urban Development (HUD) pursuant to Section 1517 of the Housing and Economic Recovery Act (HERA) of 2008 (P.L. 110-289).

The problems in the mortgage market are routinely referred to as a “foreclosure crisis” because the level of defaults and foreclosures greatly exceed previous peak levels in the post-war era and, as a result, have drawn comparisons to the levels of distress experienced in the Great Depression.

This report contains a review of the academic literature and industry press on the root causes of the current foreclosure crisis, data and analysis of trends in the market, and policy responses and recommended actions to mitigate the current crisis and help prevent similar crises from occurring in the future.

Trends in Delinquencies and Foreclosures
To help define the nature of the foreclosure crisis, the report begins by presenting basic information on trends in mortgage delinquencies and foreclosure starts, relying largely on data from the Mortgage Bankers Association National Delinquency Survey.

According to this survey, between late 2006 and mid-2007, the share of loans that were seriously delinquent or beginning the foreclosure process reached their highest levels since the survey was begun in the late 1970s. Since then, these rates have continued to rise sharply, and, by mid-2008, had more than doubled the previous record highs. Most of the initial increase in foreclosures was driven by subprime loans, both due to the fact that these inherently risky loans had come to account for a much larger share of the mortgage market in recent years and because the foreclosure rates among these loans were rising rapidly.

In addition, “Alt-A” loans, another fast-growing segment of the market, began experiencing higher delinquency and foreclosure rates.1 In both the subprime and Alt-A market segments, foreclosures have grown most rapidly among adjustable-rate loans. But, as the economy deteriorated in 2008 and into 2009, the level of foreclosures among prime fixed-rate loans also rose, further exacerbating the crisis.

Given the magnitude of this crisis, it is perhaps not surprising that the increase in foreclosures is evident across the country, affecting most areas. Nonetheless, there are significant differences in the extent of the foreclosure crisis across market areas. The report analyzes the regional patterns comparing the most recent year’s foreclosure start rates and increases in foreclosure start rates since the start of the crisis by state.

Consistent with popular press accounts, one group of states stands out as having been most severely impacted by the crisis—these states not only had the highest rates of foreclosure starts in 2008, they also experienced the highest increase in foreclosure starts since 2005.

This group has been referred to in the press as the “sand states” as it includes Arizona, California, Florida, and Nevada. The sand states all had a high incidence of high-cost (subprime) lending in 2006, coupled with a much larger run-up in home prices before the crisis hit. Perhaps because of this robust house price growth, these states enjoyed some of the lowest foreclosure start rates in the nation in 2005. However, the fall in house prices from 2005 to 2008 was most dramatic in the sand states.

Further exacerbating problems in these four states has been a sharp rise in unemployment since 2005, with unemployment rates rising from below the national average to among the highest rates in the country.

It is noteworthy to contrast the experience of the sand states with a second group of states that were also severely impacted by the crisis, but in a different way. This second grouping comprises states that had relatively high foreclosure rates even before the crisis began due to weaknesses in local economies, although the gain in foreclosure rates was less dramatic than in the sand states.

Prominent among these states are the industrial states from the Midwest, including Illinois, Indiana, Michigan, and Ohio. House prices fell in these states after 2005, but not by as much as in states that experienced higher price increases prior to the crisis. In 2005, the industrial states had much higher unemployment rates than other states. Since 2005, economic conditions have deteriorated further, with falling housing prices and rising unemployment contributing to foreclosure rates in 2008 and 2009 nearly as high as those in the sand states.

Download Full Report: Report to Congress on the Root Causes of the Foreclosure Crisis

PDF format, 1MB, 83Pages.

U.S. Department of Housing and Urban Development
Office of Policy Development and Research

Contents
Executive Summary..........................................................................................................................................vi
Introduction.........................................................................................................................................................1
1. Trends in Delinquencies and Foreclosures .................................................................................................2
Regional Trends in Foreclosures....................................................................................................................9
2. Literature Review ......................................................................................................................................15
2.1 General Literature on Causes of Foreclosures and Delinquencies .....................................................15
2.2 Literature Assessing Causes of the Current Foreclosure Crisis..........................................................18
2.2.1 Contribution of House Price Declines .................................................................................19
2.2.2 Contribution of Weak Economic Conditions ......................................................................20
2.2.3 Contribution of Growth in Risky Loans ..............................................................................21
2.2.4 Overall Conclusions on Precipitating Causes of Crisis .......................................................29
2.3 Factors Enabling Expanded Risky Lending........................................................................................30
2.3.1 Key Market Developments in the 1980s and 1990s ............................................................30
2.3.2 Failure of the Regulatory Environment To Adapt to Market Changes................................32
2.3.3 Factors Fostering the Surge in Risky Lending in the 2000s................................................37
2.3.4 Contribution of Mortgage Fraud, the CRA, and the GSEs..................................................39
3. Policy Responses to the Foreclosure Crisis...............................................................................................44
3.1 Efforts To Address Rising Foreclosures..............................................................................................44
3.1.1 Efforts To Enhance the Ability of Households To Remain in Their Homes.......................44
3.1.2 Efforts To Enable More Aggressive Loan Modifications....................................................47
3.1.3 Efforts To Reduce the Negative Impact on Communities...................................................49
3.1.4 Efforts To Protect Renters Affected by Foreclosures..........................................................50
3.2 Efforts To Reduce the Risk of Unacceptably High Rates of Mortgage Foreclosures in the Future ...52
3.2.1 Expanding the Ability of Consumers To Make Wise Choices............................................52
3.2.2 Legal and Regulatory Efforts To Ban Deceptive Lending Practices...................................53
3.3 Comprehensive Mortgage Market Reform.........................................................................................54
3.3.1 Efforts To Promote Uniform Regulations in the Primary Market.......................................54
3.3.2 Secondary Market Reform Initiatives..................................................................................55
References............................................................................................................................56
Additional Reading .....................................................................................................64
Appendix.........................................................................................................A-1

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