Foreclosed America
Isaac Martin and Christopher Niedt




In the peak years of the foreclosure crisis, from 2007 to 2012, almost one American adult in twenty lost a home because of inability to afford the mortgage payments. That amounts to more than ten million people.1

The human face of the foreclosure crisis can be hard to see in numbers like these. The most commonly available foreclosure statistics are collected by the mortgage banking industry for the benefit of investors and count loan transactions or houses—not families or people. Take one such statistic, the foreclosure start rate. This is the percentage of outstanding mortgage loans that entered the foreclosure process within a given period of time. By convention, the foreclosure start rate is measured quarterly. Figure 1 depicts the annual average of the quarterly foreclosure start rate since 1986. It shows that the foreclosure start rate was more or less constant until it began increasing rapidly in 2006. The rate peaked in 2009. (As of 2013 it was still near a record high—meaning that mortgaged homes were still being added to the foreclosure inventory at something very close to the fastest rate ever recorded.) It is easy to forget that every vertical inch on this line graph represents hundreds of thousands of homeowners, each receiving an official notice that a banking institution has initiated legal proceedings to repossess their home.2

FIGURE 1. A tsunami of dispossession: Annual average of the quarterly foreclosure start rate.

SOURCES: U.S. Department of Housing and Urban Development; Mortgage Bankers Association

Every foreclosure is the end of someone’s personal story. It begins when someone takes out a mortgage to buy a home. Then they miss a few loan payments. Then the missed payments pile up. After several months of late payments, the mortgage holder, which is typically a lending institution—though not necessarily the same institution that originally made the loan—may initiate the legal paperwork for a foreclosure sale. The precise timetable varies from state to state, but in every state the paperwork includes sending a legal notice to the borrower that foreclosure is imminent. And that legal notice starts a clock ticking.

At this point the stories may diverge. A homeowner who receives a notice of default has a short time and a few options. One is to make good on the late payments, or “cure the default,” in the jargon of the industry. If that is impossible, then the homeowner may try to persuade the mortgage holder to renegotiate the terms of the loan. If the mortgage holder is not willing to renegotiate the mortgage, it may still be willing to write off some or all of the remaining debt if the homeowner can sell the property, perhaps for less than the amount of the debt (a “short sale”). If a short sale proves impossible, the homeowner might be able to cancel the debt and avoid the trouble of a legal proceeding by signing the property over to the mortgage holder (a “voluntary conveyance”; the document is sometimes called a “deed in lieu” of foreclosure). If none of these options proves possible before the clock runs out, then the mortgage holder or its legal representative may put the property up for sale. This seizure and sale of the property is the foreclosure proper. If no one bids enough, the mortgage holder may itself buy the property, in hopes of putting it up for sale again at a later date when prices have increased; in the meantime, the property is said to be “real-estate owned.” Regardless of who buys the property, once it is signed over or sold the former owner is dispossessed. If he or she is still living in the property, then he or she may be subject to eviction. Most foreclosed homeowners clear out before the sheriff shows up.

In the peak years of the crisis, most homes in default went all the way to foreclosure. Lenders and servicers renegotiated less than a quarter of delinquent home loans, and even some of those eventually ended up as foreclosures. In some circumstances, borrowers were able to sell off the property for less than the cost of the loan or simply turn over the deed and have the bank take most of the loss, but such short sales and voluntary conveyances were also relatively rare until late in the crisis. A very few borrowers were able to cure their delinquencies without help from lenders. As loan interest rates reset, unemployment rose, and home equity diminished, a growing number of families simply couldn’t make their payments. Others might have been able to stave off default for a while longer, but decided that it did not make sense to strain their finances only to end up owing more than their houses were worth.3

The final chapter in the story of a foreclosure depends on the precise steps taken by the borrower and the lender. It also depends on the precise legal framework. In about half of the states, the path to a foreclosure goes through the courts: the lender must file a lawsuit to initiate a foreclosure, and the sheriff’s office conducts an auction. In the other states, a lawsuit is not required; the process begins as soon as the lender notifies the appropriate local officials, and it moves considerably faster. Regardless of these differences, the story generally ends the same way: defeated people pile their belongings into a car or van, drive away, and try to start over.


To understand how so many people lost their homes, we have to understand how so many people came to take out loans that they could not pay back. And to understand how that happened, we have to understand why anyone was willing to lend them the money in the first place.

The answer is that for a time, the rules of the mortgage market made it profitable to lend to them. These rules were new. They replaced an old framework that dated from the Great Depression, when the housing market and banking sector were in turmoil and foreclosures were widespread. The federal government responded by refinancing hundreds of thousands of mortgages—and also by standardizing rules of mortgage lending so that the same thing wouldn’t happen again. It promoted and insured the longer-term, fixed-rate, fully amortizing loans, the “plain vanilla” loans that Americans eventually came to take for granted. The government also established a publicly regulated secondary mortgage market that provided capital to lenders. Federal regulations limited the ability of investment banks to gamble with mortgages, and together with other regulations like state antiusury laws, these rules stabilized the market and provided some protection for borrowers. The government also set underwriting standards for loan insurance, which improved affordability and housing quality for many Americans. Not all of the old rules were benign: some of the standards discouraged lending to minority and integrated communities, a practice that was called “redlining” because of notorious mid-twentieth-century maps that depicted such neighborhoods with red lines drawn around them, indicating they were disfavored places to lend. Although loans were not provided equally in all neighborhoods, government policy nevertheless enabled millions of new borrowers to receive access to loans that they could afford, with terms that they could understand, from lending institutions that wanted to see those loans repaid.4

Policy-makers began to change the rules in the 1970s and 1980s. Housing advocates pressured the government to do away with redlining and require fairness in mortgage lending; one result was the passage of the Community Reinvestment Act in 1977, which made it harder for banks to discriminate and encouraged them to offer loans of similar quality to all communities. At the same time, lending institutions were lobbying the government to ease other restrictions on the mortgage market. They argued that more lenders would be encouraged to provide mortgages to underserved neighborhoods if those lenders were allowed to set higher interest rates for riskier borrowers. Many policy-makers agreed. Interest rate caps were lifted. New federal legislation made it easier for some lenders to evade state consumer protection laws, and even permitted some lenders to avoid federal regulation by allowing them to pick and choose which federal agency would regulate their activities.5

The new rules encouraged investors with different motives to get into the business. It used to be that savings and loans and banks had made long-term mortgage loans in order to profit from the steady stream of interest payments that borrowers made. These lenders had a clear stake in vetting borrowers carefully to ensure that they would be able to make their payments consistently. As soon as the rules changed, however, some savvy creditors started to treat mortgage loans as a way to make a fast buck. The game was to make large numbers of mortgage loans and then bundle together the mortgage notes into residential mortgage-backed securities that could be resold to other investors. The seller of the securities got a fast infusion of cash; the buyer got the right to collect a share of the payments from the borrowers whose mortgages were bundled together.6 As more mortgage lenders began to play this game, they became less interested in whether the mortgage borrowers would actually make their loan payments on time. By the time that the loan came due it would be someone else’s problem.

It was a game that created opportunities to profit from complexity and confusion. Banking institutions devised more and more elaborate ways to package the securities, by dividing and recombining the promised income from bundles of mortgages into more and more complex securities that could be niche-marketed to particular investors with different time horizons and appetites for risk. This process camouflaged risky, high-interest loans as safe investments. As investors became hungry for the high rates of return that they could get by investing in mortgage-backed securities, lenders—especially mortgage companies—saw an opportunity to profit by making more and more loans at high interest rates, pocketing the transaction fees, and selling off the mortgages quickly before borrowers defaulted. During the late 1990s and early 2000s, a period that with the benefit of hindsight we can call “the first subprime boom,” this pattern was limited to refinance loans, mostly in neighborhoods that had been credit-starved during decades of redlining. But during the second subprime boom of the mid-2000s, high-rate lending spread from refinance loans to home purchase loans, and from redlined Rustbelt neighborhoods to sprawling Sunbelt suburbs. Eventually, it spread to the whole country.7

Investor demand for high-interest securities perverted the lending business. The way for a lender to succeed in business was no longer to identify borrowers who could be relied on to make steady mortgage payments for decades. Instead, it was to make loans as quickly as possible, to as many purchasers as possible. In order to move high volumes of loans through the pipeline, brokers often disregarded the creditworthiness of less qualified borrowers or falsified information to make such borrowers seem more qualified. Many brokers steered even highly qualified borrowers with excellent credit toward subprime-style, high-rate loans, because those loans came with high commissions or bonus payments for the brokers.

That is how so many would-be home buyers found mortgage companies not only willing to lend to them, but positively knocking down their doors during the height of the boom. As more buyers entered the real estate market, home prices rose, and as prices rose, lenders introduced complex and deceptive new loan features to disguise those high prices. Many of the new loans were adjustable-rate mortgages or hybrids with fixed, low “teaser” rates that would convert to higher, adjustable rates one, two, or three years down the road. Others were interest-only or negative-amortization loans that had low monthly payments but left borrowers with little or no equity at the end of the term. These features made housing seem more affordable to buyers in the short run, and so the cycle continued: more buyers entered the market, and prices continued to rise.8

Home buyers found many different reasons to take the loans they were offered. Some of them were victims of fraud. Government investigations have turned up ample evidence of mortgage fraud in the boom years, and areas that suffered the highest rates of such fraud in the mid-2000s later experienced the highest rates of foreclosure during the crisis. Other borrowers were not defrauded, but took out risky loans in confidence that they could refinance before the monthly payments became too much to afford. If the value of the home kept rising, the thinking went, then the home could be used as collateral for a new loan with better terms, even if the borrower’s income had not increased. A small group of homeowners took out risky loans to buy second homes as investment properties during this period, banking on rental income to pay off the loan. These investors were never a large proportion of mortgage borrowers: nationally, about 10 percent of subprime lending from January 2003 through June 2007 went to investment properties. An even smaller group of buyers may have been indifferent to bad loan terms because they were buying homes with the intent to resell them at a profit before the onerous loan terms kicked in. The practice of reselling homes quickly, or “flipping houses,” was highly visible in the boom years—it was even the subject of popular TV shows with names like Flipping Out and Flip This House—but flippers were a very small share of the market.9 The great majority of residential mortgage borrowers planned to live in their homes and either thought they could afford their mortgage payments or were willing to take a chance, and counted on their ability to sell or refinance in the event of unforeseen problems.

Different borrowers had different reasons, but almost all of them were counting on home prices to keep increasing. It was a gamble, but it was the same gamble that lots of other buyers were taking, and it was a gamble that seemed to work: as long as buyers kept taking out mortgages and investors kept buying the mortgages, more people kept entering the market, and home prices did indeed go up.

Until they stopped. The precise triggering event is unknown, and it is also unimportant. Who can ever know which pebble started an avalanche? The system was so fragile that it did not take anything dramatic to trigger a collapse. Maybe a prospective home buyer somewhere shrugged her shoulders and decided to stick with renting for now; maybe another prospective buyer followed her lead. In any case, people stopped bidding prices up quite so quickly. And then they stopped bidding prices up altogether. Home prices plateaued in the middle of 2006.

Then the cascade downward began.

Homeowners who had counted on rising prices found themselves stuck with loans that they couldn’t afford. More and more of them began to miss payments. During late 2006 and early 2007, rising rates of borrower default began to alarm mortgage lenders. When a number of subprime lenders went bankrupt, many more investors in the second ary mortgage market, including hedge funds, investment banks, and commercial banks, began to discover just how much of their assets they had bet on mortgage-backed securities, and just how risky those bets were. Their worries about the solvency of other banks and financial institutions led them to stop lending. Mortgage lenders that could not get credit stopped lending in turn. That meant no more loans to would-be home buyers. Homeowners in trouble could no longer refinance. Homeowners were also increasingly hard-pressed to sell their homes because buyers could not secure mortgages. Home prices fell faster and faster. Even many borrowers with plain vanilla, fixed-rate mortgages found themselves owing more than their homes were worth.10

Eventually the crisis in the banking sector sent the rest of the economy spiraling into recession. Many homeowners were laid off, or didn’t get raises they had counted on, and joined the growing numbers of people who couldn’t make their mortgage loan payments. Borrowers were now defaulting at record rates. As the nightly news reported on the growing number of foreclosed homes and displaced households, commentators expressed astonishment at the bust. They needn’t have. Housing researchers had long warned about the fragility of the secondary mortgage markets, and with hindsight the housing bubble seems obviously unsustainable.11 But no one knew in advance exactly when the bubble would burst. That is part of what made it a bubble.

Similar stories have been told hundreds of times about hundreds of different speculative bubbles that have crashed spectacularly and left investors dazed in their wake. History records investment bubbles in assets as various as tulip bulbs, spices, stuffed toys, and internet startup companies. Housing bubbles may be especially common—unlike other goods, the value of housing depends on its location, so the value of a home rises and falls with the values of other homes nearby, magnifying the volatility of prices—but from the standpoint of speculative investors, houses are no different in principle from internet startups or baseball cards.12 They are interchangeable investments whose value comes from the expectation that other people will find them valuable.

From the standpoint of ordinary people, however, this bubble was different. Because the thing people were speculating on in this case wasn’t just an investment on a bank’s balance sheet. It was somebody’s home.


1. In 2012, the New York Times estimated from such published foreclosure statistics that “four million families . . . lost their homes to foreclosure” in the years from 2007 to 2012 (see Shaila Dewan and Nelson D. Schwartz, “Deal Is Closer for a U.S. Plan on Mortgage Relief,” New York Times, February 5, 2012: A1). That number is almost certainly an underestimate of how many families lost homes in the crisis, because it counts only homes that proceeded all the way to a foreclosure sale, and leaves out homes that people surrendered to their lenders before the actual foreclosure. It also appears to be based on the assumption that there was one and only one family per household—an assumption that became less and less accurate as the crisis unfolded and families doubled up. Our estimate that 4.6 percent of American adults, or almost one adult in twenty, lost a home in the period from 2007 to 2012 comes from the National Suburban Poll (see the online appendix,, Table 1), and our estimate of ten million comes from applying this estimate to the total population of the United States eighteen years old or older as reported by the 2010 Census. This number differs from the four million reported by the New York Times because our estimate refers to adult individuals rather than families, and because our estimate includes adults who lost their homes because they could not make mortgage payments even if the transfer took the form of a short sale or a voluntary conveyance instead of a foreclosure sale.

2. U.S. Department of Housing and Urban Development, U.S. Housing Market Conditions: 2nd Quarter 2009 (Washington, D.C.: U.S. Department of Housing and Urban Development, 2009), 75 (table 19); Mortgage Bankers Association, “Delinquencies Continue to Climb, Foreclosures Flat in Latest MBA National Delinquency Survey,” August 20, 2009,; “Short-Term Delinquencies Fall to Pre-Recession Levels, Loans in Foreclosure Tie All-Time Record in Latest MBA National Delinquency Survey,” February 17, 2011,; “Significant Declines in 90+ Day Delinquencies and Foreclosures in Latest MBA National Delinquency Survey,” May 19, 2011,; “Delinquencies Decrease, Foreclosures Rise in Latest MBA Mortgage Delinquency Survey.” November 17, 2011,; “Mortgage Delinquency and Foreclosure Rates Decreased,” November 15, 2012,; “Mortgage Delinquency Rates Increase, But Foreclosure Inventory Rate Down Sharply,” May 9, 2013,;“Mortgage Delinquencies, Foreclosures Continue to Drop,” August 8, 2013,; “Delinquency and Foreclosure Rates Decline to Lowest Level in Six Years,” February 20, 2013,; all retrieved September 26, 2014.

3. For data on the relative frequency of various alternatives to foreclosure in the crisis years, see Sunit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, and Douglas Evanoff, “The Role of Securitization in Mortgage Renegotiation,” Journal of Financial Economics 102, no. 3 (2011): 559–78; Yan Zhang, “Does Loan Negotiation Differ by Securitization Status? A Transition Probability Study,” Journal of Financial Intermediation 22, no. 3 (2013): 513–27; Andra Ghent and Marianna Kudlyak, “Recourse and Residential Mortgage Default: Evidence from U.S. States,” Review of Financial Studies 24, no. 9 (2011): 3139–86. See also Jerry Anthony, “Home Burdens: The High Cost of Homeownership,” in Broke: How Debt Bankrupts the Middle Class, ed. Katherine Porter (Stanford, Calif.: Stanford University Press, 2012), 65–84; and Marianne Culhane, “No Forwarding Address: Losing Homes in Bankruptcy,” ibid., 119–35.

4. For an overview, see, e.g., Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States (New York: Oxford University Press, 1985), 190–218.

5. See Kathleen C. Engel and Patricia A. McCoy, The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps (New York: Oxford University Press, 2011).

6. The government-backed firms Fannie Mae and Freddie Mac had pioneered the use of residential mortgage-backed securities to encourage more investment in residential mortgage lending. But in the 1980s and 1990s, a growing share of the trade in these securities was carried on by nongovernment firms, in ways that were almost entirely concealed from government oversight.

7. The “first subprime boom” is from Dan Immergluck, “Private Risk, Public Risk: Public Policy, Market Development, and the Mortgage Crisis,” Fordham Urban Law Journal 36, no. 3 (2008): 469. Although there was also a large increase in subprime lending for home purchase during the second subprime boom, there is evidence that the majority of subprime loans made even during the second boom were refinance loans (see, e.g., Bethany MacLean, “A House Is Not a Credit Card,” New York Times, November 13, 2014: A27). Of course, many of those borrowers may have been refinancing in order to obtain more favorable terms on first-purchase loans that were, themselves, subprime.

8. See Dan Immergluck, Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America’s Mortgage Market (Ithaca, N.Y.: Cornell University Press, 2009).

9. Eric Baumer, Ashley Arnio, and Kevin Wolff, “Assessing the Role of Mortgage Fraud, Confluence, and Spillover in the Contemporary Foreclosure Crisis.” Housing Policy Debate 23, no. 2 (2013): 299–327; Christopher Mayer, Karen Pence, and Shane Sherlund, “The Rise in Mortgage Defaults,” Journal of Economic Perspectives 23, no. 1 (2009): 27–50. One careful study estimates that “serial flippers” accounted for about 2 percent of home purchase transactions in the five-county Los Angeles area in 2008: Patrick Bayer, Christopher Geissler, and James W. Roberts, “Speculators and Middlemen: The Role of Flippers in the Housing Market,” National Bureau of Economic Research, Working Paper No. 16874 (2011). Because serial flippers are people who flipped at least two houses, their share among purchasers must have been less than their share of all purchase transactions; thus, we can infer that these speculators must have been fewer than 1 percent of all home buyers in that geographic market in that period. And that estimate comes from just after the peak of the boom in Southern California, one of the frothiest real estate markets in the country, so it is probably safe to assume that in most places flippers were even rarer.

10. This paragraph follows the chronology as reconstructed in Johan A. Lybeck, A Global History of the Financial Crash of 2007–10 (New York: Cambridge University Press, 2011).

11. See, e.g., Jeff Crump, “Subprime Lending and Foreclosure in Hennepin and Ramsey Counties: An Empirical Analysis,” CURA Reporter (Spring 2005): 14–19; Kathleen Engel and Patricia McCoy, “A Tale of Three Markets: The Law and Economics of Predatory Lending,” Texas Law Review 80 (2002): 1255–1378; Jane Jacobs, Dark Age Ahead (New York: Vintage Books, 2004), 32; Elvin Wyly, Mona Atia, and Daniel Hammel, “Has Mortgage Capital Found an Inner-City Spatial Fix?” Housing Policy Debate 15, no. 3 (2004): 623–84.

12. Adam J. Levitin and Susan M. Wachter, “Why Housing?” Housing Policy Debate 23, no. 1 (2013): 5–27.