The Long-Term Consequences of Foreclosures

Of course a wave of foreclosures is bad for any community, but a paper authored by researchers at Boston and Stanford universities shows the many ways that foreclosures worsened the last downturn in the housing market.

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. These losses ate up the available funds that could be used to extend new loans to consumers. As a result, lenders were forced to ration credit more aggressively, leading to a larger share of potential borrowers being denied mortgages. That dampened both housing demand and home prices.

In addition to dwelling on the impact of foreclosures, the authors compared four approaches to mitigating the downturn, including calculating the cost of the government buying, holding, and eventually selling foreclosed homes compared with bailing out lenders.

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