The number of annual foreclosure filings rose from 1.3 million in 2006 to 2.2 million in 2007, to 3.3 million in 2008, and to almost 4.0 million in 2009 (RealtyTrac).
In order to determine whether foreclosure will continue, it is first necessary to determine the causes of these higher foreclosure rates and then to determine whether those causes are continuing. Foreclosures occur because an individual with a mortgage cannot afford the mortgage any longer and because the individual will not recover the amount of the mortgage from the sale of the home. So it is necessary to figure out what might cause individuals to have difficulty affording a mortgage and for the house values to decline below mortgage values.
What might cause a decline in mortgage affordability would be closely related to all macroeconomic measures that affect income. So GDP and the unemployment rate will certainly affect incomes and thus home affordability, since less GDP means less economic activity, which in turn means declining profits and more unemployment. Obviously, lower profits and more unemployment translates into less money for people and thus more people unable to afford their mortgages. In fact there has been an extremely close correlation between unemployment rate and mortgage delinquency. One analysis has found a correlation of 98% between unemployment rate and delinquency rate between 2004 and the middle of 2009 (Calculated Risk). This close relationship is a contrast to what has been evidenced in the past, as the correlation between foreclosure rates and unemployment rates were found to be weak before this latest housing boom/bust cycle. In 1998 two economists examined the relationship between unemployment and mortgage foreclosure rates from 1950 to 1998, and concluded that there was very little correlation between unemployment changes and mortgage foreclosures (Elmer and Seelig). Yet because of the changing nature of mortgages beginning in the 1990s, the association between foreclosures and unemployment has become quite significant. Traditionally 20% downpayments had been the minimum requirement for most borrowers, but this requirement was increasingly weakened over the last 10-15 years (Calculated Risk). Therefore suddenly unemployed or underemployed homeowners who must sell may find themselves with mortgages worth more than the value of the home, due to the lack of equity and the declining home values, and will therefore have to foreclose.
So as long as there is high unemployment and declining home values, more foreclosures are likely to occur. The decline in the house value below the mortgage value would occur if housing prices have fallen from the original time the mortgage was issued. Home prices began their decline in the middle of 2006 and have fallen to 2003 levels, and have shown modest increases since the beginning of 2009 (Case-Shiller). So homes that were purchased after 2003 are the most vulnerable to foreclosure. Home purchases before 2003 will be vulnerable to foreclosure if there was refinancing. The closer in time the home purchase or refinance was to the peak of mid-2006, the more vulnerable that loan will be to foreclosure, since those loans will have the highest mortgage/home value ratios. During the 1990s, mortgage loan originations (both purchase and refinance) were around 200 billion per quarter. This number began to rise in the late 1990s, fell back briefly, and started to rise again