case western reserve university



June 23, 2008

Pathways to Foreclosure

Pathways to Foreclosure

New Poverty Center report examines circumstances most likely to lead a property to foreclosure

Foreclosure rates in Northeast Ohio have grown exponentially in recent years and present unprecedented challenges for communities, governments and households. Subprime lending has also increased markedly as a proportion of all mortgage loans originated in the region during this period and is widely believed to have played an important role in the current foreclosure crisis.

The Center on Urban Poverty and Community Development has produced a report, "Pathways to Foreclosure: A Longitudinal Study of Mortgage Loans, Cleveland and Cuyahoga County, 2005-2008," that takes a deeper look at the connection between foreclosures and the circumstances surrounding the mortgage loans that are the subject of these foreclosure filings. The focus of the analysis is on mortgage loans that were originated in Cuyahoga County in 2005 and 2006 and foreclosed between 2005 and early 2008.

The study finds that by far the strongest predictor of a loan foreclosing is that it was a high cost subprime loan. For home purchase loans, those that were high cost subprime had an 816 percent higher chance of going into foreclosure than other loans. Indeed subprime lending accounted for 84 percent of the foreclosures on home purchase and refinance loans in the study period. And because the study tracked loans for only three years at the most, this is an underestimate of the ultimate subprime foreclosure impact.

Foreclosure rates on high cost subprime loans peaked early in the second year after origination and again as year three approached suggesting that some loans are in trouble from the outset while others become problematic due to events later on. A large racial disparity was identified in that African American borrowers at all income levels were 2-3 times more likely to receive high cost subprime loans than their white counterparts leading to high rates of foreclosure in this population. High cost subprime foreclosures were also concentrated geographically fueling additional foreclosures in these areas. Although hundreds of lenders were active in the Cleveland area market, a relatively short list of lenders was responsible for originating most of high cost subprime loans that foreclosed. National mortgage companies, not local banks, dominated this list. As a result of securitization and servicing agreements, the plaintiffs filing the foreclosure actions were seldom the lenders who originated the loans. A few big companies dominated this stage in the process with 5 companies accounting for 75 percent of all high cost subprime loan foreclosure filings. When served with a foreclosure notice, only 16 percent of borrowers filed an answer with the court. Thus, without intervention, most of these high cost subprime foreclosed properties will proceed to sheriff’s sale and vacancy with all of the losses that entails for households and communities.

Download Report

View all Research & Publication Updates

Visit NEO CANDO, the Poverty Center's Neighborhood Information System

Foreclosure Research from the Poverty Center

Facing the Foreclosure Crisis in Greater Cleveland: What happened and How Communities Are Responding
Trends in Home Purchase Loans
Beyond REO
Pathways to Foreclosure
Foreclosure and Beyond
Properties Owned by Financial Institutions

Maps from Pathways to Foreclosure