Like HowStuffWorks on Facebook!

What caused the recent rash of home foreclosures?


Various factors led to the recent rash rash of home foreclosures but the basic reason is the state of the economy. The credit crunch, the loss of jobs, the fall in house prices and the problem of subprime mortgages all contributed to the high rate of home foreclosures. The reasons may vary but they all add up to the fact that when people can't pay their mortgages they are forced to foreclose.

According to the Mortgage Bankers Association, 2008 had the highest rate of foreclosures in 36 years. There is also a correlation between falling house prices and increasing foreclosure[source: Christie]. When a mortgage is higher than the value of the home, especially when the mortgage payments are too high for the homeowner to manage, the homeowner will often foreclose and walk away. According to The Office of Federal Housing Enterprise Oversight (OFHEO), falling house prices and foreclosures tend to work in tandem. It's hard to see what comes first, especially if there is an oversupply of houses on the market. In many states before the credit crunch, investors invested in new real estate, creating a housing bubble, which then burst, leaving a lot of property virtually unsellable. Investors unable to recoup their losses, foreclose. [source: OFHEO]

The economy in different states varies enormously. In California, the main problem is with subprime mortgages and with many people making very high payments on houses whose value is dropping all the time. On the other hand, in the Midwest -- in Ohio and Michigan -- the main driving force behind foreclosures is the loss of jobs in the bad economy. If you combine job losses, illness, loss of income, and falling house prices with high mortgage payments you can start to see why foreclosure may be the only option for many people.