Rates at which foreclosures are added to the housing market. Foreclosure rates vary from state to state and fluctuate depending on a variety of factors (unemployment, access to loan modification, etc.).
Before we can look at the current foreclosure rates in the United States, we should look back at history to see how we got here. Not only is it important to assess the foreclosure rate historically, but it's also critical to look at how the government responded to the most recent crisis.
When you look back at the time period from about 1970 to 1998, you will notice that national foreclosure rates increased at a gradual pace throughout those three decades. In fact, the FDIC published an article back in 2008 discussing a gradual increase in these rates in the USA. Their research showed that there really wasn't a strong connection between interest rates, unemployment rates and the foreclosure rate.
By 2005, however, house prices in the United States had peaked. In late 2006, the country started to experience a sharp decline in house prices. Delinquencies on mortgage payments and foreclosures rose sharply as the housing prices slowed or declined. By the fourth quarter of 2007, statistics showed that 3.6% of residential mortgages, 14.4% of subprime mortgages and 20.4% of adjustable rate subprime mortgages were in a seriously delinquent state. This meant that payments were already 90 days past due or the property was already in foreclosure.
The decline in housing prices was variable throughout the country. Many investors watches foreclosure rates by state to find the best areas to invest. Sometimes it would even vary by city and by county. The highest foreclosure rate was changing from area to area.
When the housing crisis was in full swing, the government decided to take different actions to try to slow the bleed of home foreclosure rates. Many government officials started suggesting to lenders that they needed to modify loan terms with borrowers who were in default. The subprime lending market was completely wiped out as the government made new regulations to avoid problems in the future.
One of the biggest reasons that many of experts believe that the housing crisis took place is because so many homebuyers who shouldn't have own homes did. The ease of getting subprime lending at the time had created a whole new group of homebuyers who were really more suited to renting. These buyers had higher debt obligations, poor credit and low income in many cases.
Because of the low interest rates and ease of getting financing, a whole chain of events started to happen. These low rates created higher home prices, however the monthly payment was reasonable enough for subprime mortgages to work their magic. The housing boom started, but unfortunately corruption came with it. There were all kinds of mortgage fraud issues including appraisers faking home values in order to get loans pushed through.
Many unscrupulous mortgage lenders figured out how to get just about anyone approved for a loan. There were all kinds of loans available including many that didn't require any documentation or income checks. There are also loans such as interest-only adjustable rate mortgages that often shocked the subprime borrowers in the end. In short, many people got into homes that they could not afford.
As interest rates started to go back up, prices stopped rising. Subprime borrowers could no longer make their payments as they adjusted upward. Some took out home equity loans and couldn't pay those back. The mortgage foreclosure rates began to go up.
As this process continued, the government got more involved by creating regulations and programs to help homeowners who were in distress. Lenders were told to work with borrowers as much as possible in order to modify loans so that they could get caught up on their payments. Many lenders also started allowing short sales to happen which meant that they were taking a loss to avoid a foreclosure auction.
Several government programs were put into place to try and help with the situation. These programs included the Home Affordable Modification Program (HAMP), the Principal Reduction Alternative (PRA), the Home Affordable Refinance Program (HARP) and the Second Lien Modification Program (2MP). There were also other programs created for specific situations such as unemployed homeowners.
These higher rates of foreclosure obviously brought more investors who were interested in getting a good deal on these properties. As the foreclosure rates continued to climb, investors saw this as a great opportunity to purchase homes at rock bottom prices. Because real estate historically is a good investment, investors who had money to spend were more willing to invest their funds into foreclosures for a long term profit potential. Some homes also had the potential to make money on a quick flip or as fixer uppers.
Investors had many ways to profit on these homes including going to a foreclosure auction, purchasing as a short sale or doing different types of creative financing directly with the homeowner. There are many benefits when investors purchase foreclosure homes including the ability to deal directly with the bank. The reason that this is a perk is because the bank is not emotionally attached to the property. It's a lot easier to negotiate because of this.
Some investors also worked with homeowners and the lender to do a short sale. This is a situation where the lender is willing to take less than what is owed on the property in order to avoid going through the foreclosure process. For this reason, many investors got great deals on properties.
Another profit area for investors and other buyers are government foreclosures. These are properties that have been taken back by the government entity that insured or guaranteed the loan. For instance, there are HUD homes available because borrowers defaulted on FHA loans. The VA guarantees loans for veterans, but when they default then those properties revert back to the VA.
Government foreclosures can present a great opportunity for savvy investors as well. In addition, many of the government entities also have specific programs that make purchasing their foreclosures easier. The amount of homes available varies depending on the current foreclosure rate, although buyers can look for a foreclosure list to see what is available on the market.
There is no direct correlation, but high foreclosure rates in a given area tend to increase rental fees, because of a higher demand for rental units. They may also make it more difficult to get a home loan, which will also increase the rental market.
The unemployment rate has directly affected the foreclosure rate by making it more difficult for homeowners to pay off their mortgages and keep their homes. As more people become laid off or stay out of work, the foreclosure rate rises due to an inability to make regular mortgage payments.
The foreclosure rate for a given area is the rate at which foreclosure proceedings are filed for properties that have defaulted on their loans. In other words, the rate is the amount of new foreclosures begun in a given area by banks and other lenders.
There is a causal relationship between bank foreclosures and the foreclosure rate because the number of bank foreclosures will impact the foreclosure rate for a given area. For example, for a state that has a foreclosure rate of 100,000 homes per quarter, a heavy percentage of these homes will be bank foreclosures - foreclosures initiated by the lending company.
Other foreclosures are government foreclosures or foreclosures initiated by creditors that lay claim to the property securing whatever loan was taken out (or being used for collateral for various types of liens).
Bank foreclosures are the number one cause of foreclosures in the country. More foreclosures are bank foreclosures than any other type. As a result, it is easy to find bank foreclosures that have been discounted from the original listing price or value of the home. As bank foreclosures increase in a given area, the foreclosure rate also typically increases, which in turn has an effect on home prices in the surrounding area.