This study of the root causes of the current extremely high levels of defaults and foreclosures among residential mortgages represents the final report to Congress by the Secretary of the Department of Housing and Urban Development (HUD) pursuant to Section 1517 of the Housing and Economic Recovery Act (HERA) of 2008 (P.L. 110-289). The problems in the mortgage market are routinely referred to as a “foreclosure crisis” because the level of defaults and foreclosures greatly exceed previous peak levels in the post-war era and, as a result, have drawn comparisons to the levels of distress experienced in the Great Depression. This report contains a review of the academic literature and industry press on the root causes of the current foreclosure crisis, data and analysis of trends in the market, and policy responses and recommended actions to mitigate the current crisis and help prevent similar crises from occurring in the future.

To help define the nature of the foreclosure crisis, the report begins by presenting basic information on trends in mortgage delinquencies and foreclosure starts, relying largely on data from the Mortgage Bankers Association National Delinquency Survey. According to this survey, between late 2006 and mid-2007, the share of loans that were seriously delinquent or beginning the foreclosure process reached their highest levels since the survey was begun in the late 1970s. Since then, these rates have continued to rise sharply, and, by mid-2008, had more than doubled the previous record highs. Most of the initial increase in foreclosures was driven by subprime loans, both due to the fact that these inherently risky loans had come to account for a much larger share of the mortgage market in recent years and because the foreclosure rates among these loans were rising rapidly. In addition, “Alt-A” loans, another fast-growing segment of the market, began experiencing higher delinquency and foreclosure rates.1 In both the subprime and Alt-A market segments, foreclosures have grown most rapidly among adjustable-rate loans. But, as the economy deteriorated in 2008 and into 2009, the level of foreclosures among prime fixed-rate loans also rose, further exacerbating the crisis.