The Effect of Increasing Foreclosures on the Mortgage Industry

The mortgage industry as a whole slows down when foreclosure rates are high across the country. Even if you think you are immune to the nation's credit issues, when you seek a new loan you will find the big picture affects each individual lender and borrower. Mortgage lenders operate on the basis of a risk versus reward analysis. They assume risk when extending loans and reap rewards when the loans are repaid. If loans are not being repaid, the risks begin to outweigh the reward.

Attitude of Risk and Fear

The attitude that permeates the market when foreclosures are high can be as detrimental as the actual financial problems in a recession. As less and less of their existing loans are being paid off, lenders have a high degree of fear when they approach a new loan. A borrower has to prove they are extremely different than the other borrowers who have entered foreclosure. This means any new borrower will have to have exceptional credit, a stable job and a large down payment. Government programs, such as FHA approved loans, may reduce the need for large down payments, but a person needs to have a great application to qualify for these programs. 

More Homes on the Market

When more homes are available for sale at low foreclosure rates, the market becomes a "buyers market." This means home values drop across the region or across the country. A person's ability to purchase a home relies on both a mortgage and a down payment. Aside from a first home purchase, most down payments are made with monies from a selling a previous home. When values drop dramatically, some homes sell for less than they were purchased for. This means the same person who previously purchased a more expensive home may be looking for a less expensive home. On the whole, the size of mortgages drops.

Less Lenders on the Market

In the most severe housing recessions with a high amount of foreclosures, some lenders will additionally have to close their doors. In 2007-2009, the mortgage industry saw prominent lenders like Indy Mac go under and be seized by the government. Banks determined to be carrying too much toxic debt were also eliminated from the market place. The result was less lenders on the market. With less lenders, those that remain have more market power. They can charge higher interest rates with no competitors. The consumer ends up bearing the brunt of these bank closures.

Higher Government Regulation and Control

When housing markets crash, the government will often step in to try and prevent the problem in the future. The largest government intervention since the Depression resulted from the bailout program in 2007-2008. As a part of this program, the government additionally introduced new standards to the mortgage industry. Lenders are now more responsible to federal regulators, especially those lenders who have been seized by the government. These higher standards are again passed on to the consumer. A borrower will have to meet stricter application terms in order to be accepted.