Foreclosure is the process that occurs when a homeowner with a mortgage stops making payments. The mortgage lender tries to recover the amount owed on the mortgage by taking possession of and selling the house. Foreclosure makes everybody unhappy. Banks are unhappy because they are not in the business of owning homes, which they try to unload as quickly as possible by auctioning them off at prices significantly below the going rate in the market. Homeowners are unhappy to lose their home along with any equity they had built up. Sometimes they are so unhappy they fail to maintain the property (known as blight) or intentionally damage the property as they move out which makes both the bank, and frequently neighbors, unhappy. And the neighbors are unhappy because having homes in the neighborhood selling off at a steep discount tends to push down house prices across the board.

The foreclosure rate is important because it is an indictor of the relative health of the housing market. A rising foreclosure rate indicates that there are greater numbers of potentially distressed houses entering the market (LINK TO INVENTORY), typically at a discounted price. This can depress house prices in two ways: increasing inventory can lead to lower prices, and property blight can bring down house values in the surrounding communities. Thus staying abreast of the direction that the foreclosure rate is tracking can help provide some insight into the direction of house values in that area.

According to the most recent American Housing Survey only 33% of homes are owned outright, the remaining 67% are owned at least partially by a bank. Thus the majority of houses in America, should those owners find themselves unable to continue making mortgage payments, could fall into foreclosure. The foreclosure rate attempts to measure the number of houses going into foreclosure. However understanding the foreclosure rate is complicated by the fact that foreclosure isn’t an event, it’s a process. First, the homeowner stops making mortgage payments and thus is “delinquent” on their mortgage. After the homeowner is 90+ days delinquent on their payments, the bank begins the first of roughly three steps of the foreclosure process.

• Pre-Foreclosure Filing (also known as NOD or LIS). Usually, 95 days after the bank has received the last mortgage payment, it will notify the borrower that the loan is in default status and will file a notice of default or lawsuit. This is a matter of public record.
• Auction (also known as NTS or NFS). If the homeowner hasn’t paid the bank (either by coming up with the cash or selling the house to pay off the mortgage), the house goes into public auction.
• Bank-owned (or REO). If the bank takes ownership of the property, either by working out a deal with the owner or by purchasing it at auction, they typically will try to unload it quickly to recoup the cost of the mortgage

Understanding the Foreclosure Rate - Part II

Additional Resources:

Understanding Foreclosure - Part II

Mortgage Bankers Association

ForeclosureS.com

RealtyTrac