The massive wave of foreclosures that wreaked havoc on communities across the country is among the most significant hallmarks of the previous recession.
For starters, the wave of foreclosures caused major financial losses for lenders — especially when they kept the loans on their books rather than securitizing them or selling them to mortgage giants Fannie Mae FNMA, +0.71% and Freddie Mac FMCC, +2.04%. “Both the lender-rationing effect and foreclosure-flag effect result in an imbalance of buyers and sellers, reducing the probability that a seller contacts a buyer and lowering equilibrium prices,” the researchers wrote.
Researchers estimated that the choosey-buyer and foreclosure-flag effects accounted for 32.3% of the decline in aggregate home prices during the last housing crisis, while the credit rationing lenders engaged in represented another 27.1% of the drop in prices. Researchers found the last approach to be especially effective. With this strategy, the government buys homes that were owned by people who have missed mortgage payments and then holding onto the property until demand for homes rebounds. Researchers found that this approach leads to a 40.3% decrease in the number of foreclosures and a 44.8% smaller decline in home prices nationally.