Get Sick, Get Out: The Medical Causes of Home Foreclosures

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Abstract:

In recent years, there has been national alarm about the rising rate of home foreclosures, which now strike one in every 92 households in America, and which contribute to even broader macroeconomic effects. The handy explanation for the rise in foreclosures is that irresponsible borrowers have been using exotic loan products to purchase homes they cannot in reality afford.2 Moreover, these buyers allegedly relied on optimistic projections for the housing market, and low interest rates, which have not panned out. Commentators have also pointed to lax lending standards and aggressive practices by brokers as contributing to the increase of high-risk, non-traditional loans that are more likely to foreclose.4 These factors – loose lending, irresponsible borrowers, a flat real estate market, and rising interest rates – have together become the “standard account” of home foreclosure.
Policymakers and scholars may be surprised to learn that even in the midst of this spike, one of the largest causes of home foreclosures was none of the above. We studied homeowners going through foreclosure in four states and found that medical crises contribute to half of all home foreclosure filings. If these patterns hold nationwide, medical causes may put as many as 1.5 million Americans in jeopardy of losing their homes each year.5 If these findings are accurate, they help explain the bulk of home foreclosures, which have been occurring with stubborn frequency for a quarter century.6
From the social policy perspective, it is critical that we get the story straight, as mortgage foreclosure may be one of the most significant legal devices, striking millions of Americans,7 with dramatic consequences for each one. For individuals, the purchase of a home is often the largest financial decision they ever make, and the transaction costs of getting into, and then out of, a mortgage can be onerous. Indeed, foreclosure can wipe out the homeowners’ savings and leave them owing debt on homes they no longer own.8 A foreclosure also has pernicious effects for the borrowers’ families, neighborhoods, and local communities.9 Foreclosures are expensive for lenders, reducing returns to investors in the secondary mortgage market and increasing costs to borrowers ex ante.10 Finally, foreclosures frustrate the national goal of home ownership.11 To explore the causes of home foreclosure, we conducted a survey of homeowners on the brink of foreclosure, those who have (allegedly) defaulted on their loans and whose lenders have initiated legal foreclosure proceedings.12 Most fundamentally, we simply asked homeowners what factors contributed to their defaults, but we supplemented this data with additional questions about their objective situations and with publicly-accessible data about their homes.
This preliminary study reveals that the standard account is, at best, an inadequate understanding of the causes of mortgage defaults. 13 We found homeowners that tended to have significant equity in their homes and reasonable ratios between their income and their mortgage debt burdens. Few reported that their loans were unaffordable and only about a third said increasing mortgage payments were a factor in their defaults. From the surface, these respondents appear to be able to afford their homes and have no reason to walk away from them. So why are they in default? Our evidence suggests that medical disruptions are a major contributor to mortgage default, often striking in combination with other factors. Half of all respondents (49%) indicated that their foreclosure was caused in part by a medical problem, including illness or injuries (32%), unmanageable medical bills (23%), lost work due to a medical problem (27%), or caring for sick family members (14%). We also examined objective indicia of medical disruptions in the previous two years, including those respondents paying more than $2,000 of medical bills out of pocket (37%), those losing two or more weeks of work because of injury or illness (30%), those currently disabled and unable to work (8%), and those who used their home equity to pay medical bills (13%). Altogether, we found that about 7 in 10 of our respondents either self-reported a medical cause of foreclosure, or experienced one of these indicia of medical disruptions in the years before foreclosure. In many cases, homeowners were hit with a perfect storm of factors – a few thousand dollars of medical bills, a few weeks of missed work, and perhaps a divorce or rising interest rate – all combined to push them over the edge into foreclosure.
Our findings provide a more textured account of the reality of home foreclosure, and provide new evidence of middle class financial insecurity. If these findings can be replicated by more comprehensive future studies, they will suggest broad policy reforms and reassessment of the narrowly-focused legal regime that lenders use to facilitate foreclosures. In addition to the current focus on structural adjustments, which force people out of homes they cannot afford, policymakers should consider insurance-related interventions, which could help homeowners bridge temporary difficulties caused by medical crises. We also present a legal proposal for staying foreclosure proceedings during verifiable medical crises, as a way to protect homeowners and to minimize the negative externalities of foreclosure. We begin in Section I by providing a primer on foreclosure law and a review of some of the literature on financial distress. In Section II, we outline our research methodology, and we present our results in Section III. We conclude with some thoughts on policy reforms and future research possibilities.