Information on Recent Default and Foreclosure Trends for Home Mortgages and Associated Economic and Market Developments

GAO-08-78R: Published: Oct 16, 2007. Publicly Released: Oct 16, 2007.

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David G. Wood
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Substantial growth in the mortgage market in recent years has helped many Americans become homeowners. However, as of the latest quarterly data available, June 2007, more than 1 million mortgages were in default or foreclosure, an increase of 50 percent compared with June 2005. Defaults and foreclosures on home mortgages can impose significant costs on borrowers, lenders, mortgage investors, and neighborhoods. Additionally, recent increases in defaults and foreclosures have contributed to concern and increased volatility in certain U.S. and global financial markets. These developments have raised questions about the extent and causes of problems in the mortgage market. To provide some insights on these issues, Congress asked GAO to analyze (1) the scope and magnitude of recent default and foreclosure trends, and how these trends compare with historical values, and (2) developments in economic conditions and the primary and secondary mortgage markets associated with these trends.

Overall, the number and percentage of mortgages in default or foreclosure rose sharply from the second quarter of 2005 through the second quarter of 2007 to levels at or near historical highs, but there was significant variation among market segments, loan types, and states. The overall default rate grew by 29 percent, reaching a point at which just over 1 in every 100 mortgages was in default, almost a 28-year high. The foreclosure start rate did reach a 28-year high, rising by 55 percent. The subprime market experienced substantially steeper increases in default and foreclosure start rates than the prime or government-insured markets, accounting for two-thirds or more of the overall increase in the number of loans in default or foreclosure during this time frame. Among types of loans, ARMs experienced relatively steeper growth in default and foreclosure rates, compared with FRMs which experienced no or modest increases. According to mortgage industry researchers and participants, the number and percentage of loans in default and foreclosure are likely to worsen through the end of 2007 and into 2008, due partly to scheduled payment increases for many ARMs. A number of studies and industry data indicate that a combination of economic and market developments contributed to recent increases in default and foreclosure rates. First, the rapid decline in the rate of home price appreciation throughout much of the nation beginning in 2005 may have reduced incentives for borrowers to keep current on their mortgages and made it more difficult for borrowers to refinance or sell their homes to avoid default or foreclosure. Second, in some states with foreclosure rates that were already relatively high in 2005, weak labor market conditions likely contributed to mortgage problems. Third, more aggressive lending practices--an easing of underwriting standards and wider use of certain loan features associated with poorer loan performance--reduced the likelihood that some borrowers would be able to meet their mortgage obligations, particularly in times of economic hardship or limited house price appreciation. Fourth, growth in the market for private label RMBS beginning in 2003 provided liquidity to some brokers and lenders to support these more aggressive lending practices. Investors were attracted to these securities because of their seemingly high risk-adjusted returns. A number of other factors--including incentives that potentially emphasized loan volume over loan quality and growth in the incidence of mortgage fraud--may have contributed to recent default and foreclosure trends, but additional information would be needed to fully assess their impact.

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