A foreclosure is a legal procedure that is initiated by a mortgage lender because the mortgage is considered in default. It is usually not a procedure done lightly, with the exception of some predatory lenders who made the mortgage loan in order to acquire the property.
The country has seen a huge increase in the number of foreclosures. In 2006, foreclosures in the United States increased by a full 27%. In 2007, some cities saw an increase that was closer to 40%. The foreclosure problem began prior to 2005, during an overheated seller’s market. Housing prices shot up while salaries stayed the same or even dropped. People needed a place to live and easy money was available for mortgages.
Mortgages were written in unusual or creative manners, such as being able to mortgage 100% of the sale price or the adjustable rate mortgage that lulled the homeowner with five years of small mortgage payments that doubled or tripled in year six. Also, those people who normally could not qualify for a regular mortgage were now able to get subprime mortgage loans for extra fees and a high interest rate.
Once the seller’s market turned into a buyer’s market, homeowners were left with mortgages that were more than the house was worth and an inability to refinance their ARM loans. Plus, because the economy for salaries has not kept up with the housing prices, when people were downsized or lost their high-paying jobs, they were unable to handle the high mortgage payments. So people defaulted on their mortgage loans and lenders began this raging storm of foreclosures.