Mortgage Crisis: What is the mortgage crisis?
In 2005 and 2006, lenders issued nearly 6 million subprime mortgages-loans extended to homebuyers who have lower incomes, smaller available down payments, or worse credit histories than traditional borrowers. In 2006 Center for Responsible Lending (CRL) projected that nearly 20 percent of those loans will end in foreclosure, costing homeowners more than $160 billion, mostly in lost home equity. Although homeowners across the nation are at risk, states such as Arizona, California, Florida, and Nevada have been hit particularly hard, accounting for a disproportionate share of loans entering foreclosure. Subprime foreclosures will affect more than just the projected 1.6 million families directly involved: property values for homes near foreclosed properties will also decline-perhaps by as much as an additional $200 billion, according to 2008 CRL projections-and state and local governments stand to lose significant property tax revenue. Nearly all states have responded to the crisis through outreach, counseling, or financial assistance programs, or through regulatory legislation.
See detailed table of state responses to the housing crisis
- In March 2008 about 65 percent of all homeowners-52 million-had mortgages. One-eighth of those mortgages were subprime loans issued in 2005 and 2006.
- A recent study by the Pew Charitable Trusts projects that those subprime loans will end in foreclosure for 3 percent of current homeowners-2.3 million-with the majority occurring within the next two years (see figure for a breakdown by state). As of early 2008 subprime loans accounted for about half of all loans entering foreclosure.
- The problem is widespread. The number of loans entering foreclosure in the fourth quarter of 2007 was up at least 20 percent since the fourth quarter of 2006 in all but three states: Alaska, Montana, and Vermont.
- Nonetheless, a few states are being hit hardest. Arizona, California, Florida, and Nevada together accounted for 25 percent of mortgage loans but 42 percent of loans entering foreclosure in the first quarter of 2008.
- The CRL estimates that 40.6 million neighboring homes will lose an average of $5,000 in value-an aggregate decline of $202 billion. That drop in value will likely cause a decline in property tax revenue, the major source of funding for many state and local governments.
- Only seven states1 have yet to respond to the mortgage crisis. Fourteen states2 offer direct financial assistance to homeowners, and twenty-one3 states have introduced outreach programs to alert homeowners to the dangers of subprime mortgages and ways to prevent foreclosure. Thirty-three states4 provide foreclosure prevention counseling to troubled borrowers. Thirty-seven states5 have passed laws regulating foreclosure rescue transactions, foreclosure notification and timing, or high-cost lending practices.
- The federal government has been slow to take major action but has established a program to counsel homeowners facing mortgage problems and has increased the limits on mortgages obtained through the Federal Housing Administration and through the government-sponsored enterprises Fannie Mae and Freddie Mac.