Midwestern states such as Ohio and Michigan, hard hit by the foreclosure crisis, don't have a relatively high number of subprime mortgages. What they do have is a large number of lost jobs. More than 340,000 jobs in Michigan and 200,000 jobs in Ohio have been cut since 2001 [source: Associated Press]. So economic performance of an area ranks as one of the driving forces of foreclosure, alongside declining home values and subprime mortgages.
Countrywide Financial, the largest mortgage company in the country, also cites economic performance as a cause of foreclosures. In 2007, Countrywide released its findings on the main reasons for foreclosure, which was reported in about 80 percent of the cases. Countrywide attributed "curtailment of income" as the primary factor 58 percent of the time. This far exceeds some of the other reasons:
- Illness or medical reasons made up 13 percent of foreclosures.
- Divorce came in at 8 percent.
- An inability to sell the house clocked in at 6 percent.
Surprisingly, payment adjustment on a mortgage was given as a reason only 1.4 percent of the time [source: Countrywide Financial]. We might expect this rate to be higher if subprime mortgages with adjustable rates were the number one reason for foreclosure. Countrywide's data went through July of 2007, so it's possible that the worst of the subprime rate resets were yet to come [source: Christie]. We also might take these results with a grain of salt, as Countrywide Financial is currently under federal investigation for accuracy in its loan documents [source: Simpson].
Still, personal problems, like the ones that follow, will always be one of the traditional reasons for foreclosure, regardless of subprime mortgages and housing values.
- Job Loss: As Countrywide's statistics suggest, losing your source of income will play a major factor in your ability to pay the bills. Using economic factors such as job growth and unemployment rates may help to explain why foreclosures occur in some markets and not others.
- Job Transfer or Relocation: Maybe you don't lose your job, but you're asked by your company to work in another state and to show up there pronto. You may not have time to sell your house, or you might leave the family behind so that the kids can finish the school year. Suddenly, you're stuck with two housing payments.
- Divorce: Divorce can be expensive, and it can be tricky for arguing spouses to determine who is going to make the house payment. If the primary breadwinner moves out, he or she takes on additional housing costs and might stop making the payments on the first home. There may even be some "forgotten" payments that are more malicious and retaliatory in nature.
- Deceased family member: Major injuries and illnesses can bring with them huge hospital or pharmacy costs, so expensive that mortgage payments may slip. If the primary breadwinner of a family dies, the family may not have other income to draw upon or to pay outstanding debts. If it's someone who lived outside the home, the family may find themselves with two mortgage payments.
As you can see, there's unfortunately no magic bullet that can predict foreclosure; these reasons are intertwined in complicated ways. Before you know it, you might be grappling with more than one factor. For example, being stuck with both a subprime mortgage and hefty medical bills may lead you with nowhere to turn, especially as the value in your home continues to drop.
To learn more about foreclosure and how to avoid it, see How Foreclosures Work and the links below.
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More Great Links
Appelbaum, Binyamin. "Hub group, Countrywide in deal. Nonprofit will restructure some borrowers' loans." Boston Globe. Oct. 24, 2007. (April 1, 2008)
Associated Press. "No housing bubble popped in Ohio, Michigan." MSNBC. Dec. 17, 2007. (April 8, 2008)
Berges, Steve. "The Complete Guide to Investing in Foreclosures." Amacom. 2005. (April 8, 2008)
Christie, Les. "Democrats seek quick strike vs. foreclosure." CNNMoney. March 31, 2008. (April 1, 2008)
Christie, Les. "Foreclosures hit all-time high." CNNMoney. March 6, 2008. (April 1, 2008)
Christie, Les. "Mortgage resets: Record bill coming due." CNNMoney. Aug. 13, 2007.
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Countrywide Financial. "Keynote Presentation." Bank of America 27th Annual Investment Conference. Sept. 18, 2007. (April 1, 2008)
Gerardi, Kristopher, Adam Hale Shapiro and Paul S. Willen. "Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures." Federal Reserve Bank of Boston. Dec. 3, 2007. (April 1, 2008)
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"Subprime Mortgages." Bankrate.com. May 1, 2006. (April 1, 2008)