Rising foreclosures in the United States: a perfect storm

Residential foreclosures in the United States have been rising very rapidly since 2006. In the second quarter of 2007, the share of outstanding mortgages in some stage of foreclosure stood at 1.4 percent, near historic highs and up from less than 1 percent a year earlier. The number of mortgages entering the foreclosure process reached an all-time high in mid-2007, suggesting that the foreclosure surge is likely to get worse before it gets better. ; The foreclosure surge was created by a perfect storm of events. First, in recent years the share of subprime mortgage originations increased substantially. Second, foreclosure rates for adjustable-rate mortgages (ARMs) have increased considerably, especially for subprime ARMs. This increase is largely due to rising short-term interest rates and to payment resets for many nontraditional mortgages. Finally, high loan-to-value originations in recent years, coupled with stagnant or falling home prices, have left many people with insufficient equity to sell or refinance their homes. ; Edmiston and Zalneraitis provide a detailed dissection of the current foreclosure surge. They conclude with a discussion of why the foreclosure situation is likely to get worse over the next one to two years and why it is likely to improve afterward.