Foreclosures: Should They Be Expected, Like in 2008?

When the housing bubble burst in 2006, many borrowers found themselves underwater on their mortgages, meaning that they owed more on their mortgages than their homes were worth. This made it difficult for borrowers to sell their homes or refinance their mortgages. As a result, many borrowers defaulted on their mortgages and lost their homes to foreclosure.

The foreclosure crisis had a devastating impact on the US economy. It led to a loss of jobs, a decline in consumer spending, and a drop in GDP. The crisis also contributed to the Great Recession, the worst economic downturn since the Great Depression.

The foreclosure crisis led to a number of reforms in the mortgage lending industry. These reforms were designed to make it more difficult for lenders to make subprime mortgages and to protect borrowers from predatory lending practices. As a result of these reforms, foreclosures have declined significantly since 2008. However, there is still a risk of a foreclosure crisis if the housing market declines sharply or if the economy enters a recession.

Foreclosures Were High in 2008 due to a Number of Factors

• Subprime mortgages: Subprime mortgages are loans made to borrowers with poor credit history or low incomes. These loans often have higher interest rates and fees than traditional mortgages. In the lead-up to the 2008 financial crisis, lenders made a large number of subprime mortgages, many of which were to borrowers who could not afford them.
• Securitization: Securitization is the process of pooling together mortgages and other types of debt and selling them to investors as securities. This process made it easier for lenders to make more loans, but it also made the financial system more vulnerable to a downturn in the housing market.
• Predatory lending: Predatory lending is the practice of lending money to borrowers on unfair terms, often using deceptive or unethical tactics. Predatory lenders often targeted borrowers with poor credit history or low incomes.
• The housing bubble: The housing bubble was a period of rapid and unsustainable increases in home prices. This bubble burst in 2006, leading to a decline in home prices and a wave of foreclosures.

What is the Risk of a Similar Foreclosure Crisis?

Whether foreclosures should be expected at levels like 2008 is a complex question with no easy answer. There are a number of factors that could contribute to an increase in foreclosures in the coming months and years, including:

• Rising interest rates: The Federal Reserve has been raising interest rates in an effort to combat inflation. This could make it more expensive for homeowners to borrow money and could lead to more foreclosures.
• A recession: If the economy enters a recession, it could lead to job losses and income reductions, which could make it difficult for homeowners to afford their mortgages.
• High inflation: Inflation is at a 40-year high in the United States. This is making it more expensive for homeowners to buy groceries, gas, and other essential items, which could leave them with less money to pay their mortgages.

Factors that Could Mitigate the Risk of a Foreclosure Crisis

However, there are also a number of factors that could help to mitigate the risk of a foreclosure crisis, including:

• Strong labor market: The US labor market is currently very strong, with unemployment rates at near-record lows. This should help to keep homeowners employed and able to afford their mortgages.
• High home equity: Home values have been rising rapidly in recent years. This means that many homeowners have a lot of equity in their homes, which could give them a cushion to fall back on if they experience financial hardship.
• Government programs: There are a number of government programs in place to help homeowners who are struggling to make their mortgage payments. These programs include forbearance, loan modification, and refinancing.

Overall, it is difficult to say definitively whether foreclosures will reach the levels seen in 2008. However, there are a number of factors that could contribute to an increase in foreclosures in the coming months and years.

Homeowners should be aware of these risks and take steps to protect themselves, such as building up their savings and staying in touch with their lender if they are struggling to make their mortgage payments.

Experts Divided on Whether Foreclosures Will Reach 2008 Levels

Experts are divided on whether or not foreclosures will reach the levels seen in 2008. Some experts believe that the strong labor market and high home equity will help to prevent a foreclosure crisis. Others believe that rising interest rates, inflation, and a potential recession could lead to an increase in foreclosures.

Current Statistics on Foreclosures

The current statistics on foreclosures are mixed. On the one hand, foreclosures are still at historically low levels. According to ATTOM Data Solutions, there were 33,952 U.S. properties with foreclosure filings in August 2023, up 7 percent from a month ago but down 2 percent from a year ago.

The report goes on to show states that had the greatest number of REOs in August 2023, included: Illinois (324 REOs); Pennsylvania (253 REOs); Ohio (250 REOs); New York (205 REOs); and Texas (191 REOs).

According to The Hill, economists say housing market conditions are different from the 2008 housing crash partly due to enormous equity homeowners gained in their homes in recent years and overall higher credit scores. 

Quotes from Experts on the Matter

• “The market has shifted to a buyer-friendlier market, but sellers still hold a lot of cards,” said Lindsay McLean, co-founder and CEO of HomeLister. “As mortgage rates rise and affordability dips, sellers may have to shift their expectations to match the changing market — and buyers [will] have more leverage.” Doug Duncan, chief economist at Fannie Mae: “We expect foreclosure rates to remain low in the near term, but to rise slightly in 2023 and 2024. This is due to a number of factors, including rising interest rates, inflation, and a potential recession.”
• Greg McBride, Bankrate Chief Financial Analyst: ” Prices will remain fairly steady — and in a lot of markets, that’s a price that is 40 percent or more higher than pre-pandemic.”

Tips For Homeowners to Avoid Foreclosure

Homeowners should be aware of the risks involved and take steps to protect themselves, such as building up their savings and staying in touch with their lender if they are struggling to make their mortgage payments.

Here are some tips for homeowners to help avoid foreclosure:

• Make your mortgage payments on time and in full each month.
• If you are struggling to make your mortgage payments, contact your lender immediately. There are a number of options available to help you, such as forbearance, loan modification, and refinancing.
• Build up your savings so that you have a cushion to fall back on if you experience financial hardship.
• Review your budget regularly and make adjustments as needed.
• Avoid taking on new debt, especially if you are struggling to make your current payments.

Getting Pre-Approved for a Mortgage is a Smart Way to Start the Home Buying Process

If you are considering buying a home, it is important to do your research and understand the risks involved. You should also get pre-approved for a mortgage before you start shopping for a home. This will help you to understand how much you can afford to borrow and to avoid overpaying for a home.

Embrace Home Loans® Approved to Move™ program is a great option for homebuyers who want to be in the best possible position to win the bidding war on their dream home. With this program, you will receive a fully underwritten mortgage approval letter, which gives you a significant advantage over other buyers. You will also know how much you can afford to borrow before you start shopping for a home and be able to move quickly on a home that you want to buy.

To learn more, please contact your local office today. Our experienced loan officers can help you through the home buying process and answer any questions you have.