Are Foreclosures Rising? Key Factors and Current Trends

Foreclosure is a legal process initiated by a mortgage lender to regain possession of a property when a borrower fails to make required mortgage payments. The home serves as collateral, giving the lender a legal claim if the borrower defaults. The process formally begins after a borrower misses a specified number of payments, allowing the lender to pursue ownership and eventually sell the property.

Current Foreclosure Trends

Recent data indicates an evolving landscape for foreclosure activity across the United States. In the first half of 2024, 177,431 U.S. properties had foreclosure filings, representing a 4.4% decrease compared to the same period in 2023, though an increase of 7.8% from the first half of 2022. The second quarter of 2024 saw 89,466 properties with foreclosure filings, a decline of 6% from the previous quarter and 8% from Q2 2023. This figure remains significantly below historical norms, 68% lower than the pre-recession average (Q1 2006 – Q3 2007).

Foreclosure starts, marking the initiation of the process, decreased by 3.5% year-over-year in the first half of 2024 to 130,369 properties. This trend continued into August 2024, with starts down 5.1% from July and 9.4% from the previous August. For the entire year of 2024, lenders initiated foreclosure proceedings on 253,306 U.S. properties, a 6% decrease from 2023 figures.

Completed foreclosures (REO properties) declined. In the first six months of 2024, lenders repossessed 18,726 U.S. properties, a 17% reduction from H1 2023 and a 10% decrease from H1 2022. By the end of 2024, total REO properties reached 36,505, a 13% decline from 2023.

Geographical variations in foreclosure activity are evident. In the first half of 2024, New Jersey and Illinois recorded some of the highest foreclosure rates (0.21% of housing units each), closely followed by Florida (0.20%). California, Pennsylvania, and Illinois led in REO properties during this period. While many major metropolitan areas (New York, Los Angeles, Chicago) reported foreclosure activity below pre-recession averages in Q2 2024, some areas like Honolulu, Richmond, and Baltimore experienced activity above these averages.

The average duration to complete foreclosure increased to 815 days in Q2 2024, an 11% rise from the previous quarter, though still 33% shorter than in Q2 2023. States with the longest average foreclosure timelines in Q2 2024 included Louisiana (3,686 days) and Hawaii (2,597 days). In contrast, New Hampshire and Texas demonstrated much shorter average timelines (82 and 147 days, respectively).

Key Economic Indicators and Their Impact

Unemployment rates influence mortgage default and foreclosure. Job loss is a strong predictor of mortgage payment default. Unemployed households are more prone to defaulting on mortgages than employed households. Over 30% of households behind on mortgage payments have experienced job loss.

Interest rates substantially impact the housing market and foreclosure rates. Rising interest rates increase monthly payments for homeowners, particularly those with adjustable-rate mortgages (ARMs). When ARM rates reset higher, this creates financial strain, potentially making payments unaffordable and increasing foreclosure risk. For example, a one percentage point ARM interest rate increase at reset is associated with a 2.5 percentage point rise in foreclosure probability in the subsequent year.

Inflation also affects homeowner financial well-being and ability to sustain mortgage payments. As the cost of living increases due to inflation, household budgets face pressure, making essential expenses, including mortgage payments, harder to afford if incomes do not keep pace. Lenders often respond to higher inflation by raising interest rates to offset reduced purchasing power of future loan repayments, impacting new mortgage borrowing costs. Inflation can indirectly affect homeownership costs through rising property taxes and increased home maintenance and repair expenses, adding to the financial burden.

Homeowner equity acts as a buffer against foreclosure. When home prices appreciate, homeowners build equity, providing options to avoid default. High equity allows distressed homeowners to sell their property, covering the outstanding mortgage and avoiding foreclosure, or to refinance under more favorable terms. This financial flexibility mitigates foreclosure risk, providing alternatives to those facing financial difficulties.

Consumer debt levels affect household financial stability and capacity to meet mortgage obligations. High personal debt, such as credit card balances or personal loans, reduces disposable income. This diminished financial capacity makes it difficult for homeowners to manage unexpected expenses or income disruptions, increasing the risk of falling behind on mortgage payments. Financial distress from excessive consumer debt can indirectly contribute to mortgage delinquency and foreclosure.

Stages and Types of Foreclosure

The foreclosure process begins with a borrower’s missed mortgage payments. After an initial delinquency period, typically three to six months, the lender formally initiates the process by issuing a notice of default. This notice informs the borrower of their loan agreement breach and the lender’s intent to proceed, offering an opportunity to resolve the outstanding debt. If the default is not cured, the property may proceed to a public auction or trustee’s sale.

If the property does not sell at auction, ownership typically reverts to the lender, becoming a Real Estate Owned (REO) property. The final stage, if the former homeowner remains, involves eviction proceedings to legally remove them.

There are two primary types of foreclosure processes: judicial and non-judicial. Judicial foreclosure requires the lender to file a lawsuit in court to obtain a judgment for property sale. This court-supervised method involves legal proceedings and generally takes longer to complete, often extending for many months or over a year. Every state permits judicial foreclosure, and some states mandate it.

Non-judicial foreclosure proceeds outside the court system, typically enabled by a “power of sale” clause in the mortgage or deed of trust. A neutral third-party trustee usually handles the sale, following state-mandated procedures for notification and auction. Lenders often prefer non-judicial foreclosure due to its expedited timeline and lower costs. While non-judicial foreclosures are generally faster, procedures and timelines vary widely by jurisdiction.

Other less common processes include strict foreclosure and deed in lieu of foreclosure. Strict foreclosure, permitted in limited states, allows a court to transfer property title directly to the lender without a sale, typically when outstanding debt exceeds the property’s value. A deed in lieu of foreclosure occurs when a borrower voluntarily transfers property ownership to the lender to avoid formal foreclosure, often as a mutual agreement to mitigate negative consequences for both parties.