Foreclosure Crisis

The foreclosure crisis took place between 2007 and 2010, and corresponded with high rates of foreclosures in the U.S. housing market due to the subprime meltdown and financial crisis of 2008.

The foreclosure crisis peaked in September 2010, when approximately 120,000 homes entered foreclosure in a one-month period, but its roots lay in a downturn in the housing market that began early in 2007 and blossomed into a crisis when Lehman Brothers declared bankruptcy in September 2008. A previous housing boom led to sketchy or nonexistent oversight of underwriting processes at mortgage banks, which frequently pocketed fees and promptly sold the loans to other financial institutions, which failed to do appropriate due diligence on the loans. When defaults rose, banks suddenly found themselves facing so many foreclosure events that they could not process them efficiently. In some cases, banks failed to initiate foreclosures on homes for months after homeowners had ceased to make payments. In other cases, recordkeeping processes had become so sloppy that banks could not always be sure they actually owned mortgages for properties being foreclosed.

Prior to and during the crisis, mortgage servicing companies processed large numbers of loans without adequate review of the information accompanying them. Many bank employees simply signed everything that came across their desks, assuming all paperwork to be legitimate. The robotic nature of their work resulted in the term robo-signer, used to describe employees who signed off on paperwork indiscriminately. Once the volume of foreclosures rose significantly, robo-signers created significant problems when they signed off on improper paperwork, either because they had no idea what they were signing or because they had to process far too many documents to do the proper work to authenticate them. The effects of inaccurate paperwork could potentially lead banks to foreclose on the wrong property, miscalculate home values or, in some cases, give lawyers for homeowners facing foreclosure the chance to throw the case out entirely.

The government reached a settlement with the nation's five largest mortgage servicers in 2009. The agreement, known as the National Mortgage Settlement, cost the servicers over $50 billion in penalties and consumer relief payments. Affected borrowers received principal reductions or refinances for underwater loans, allowing them to avoid foreclosure and stay in their homes. In addition, the settlement required an overhaul of the loan servicing systems overseen by the banks. Borrowers who lost homes due to foreclosure by these banks in states party to the settlement agreement became eligible for payments of approximately $1,480. The total settlement payout amounted to roughly $1.5 billion.