The Costs of Foreclosure

The positive impacts of homeownership are far-reaching -- and conversely, the negative impacts of losing a home are equally powerful. Indiana's high foreclosure rate of .98 percent -- more than twice the national average -- affects not only homeowners, but also the neighborhoods and cities in which they live. The mortgage industry also pays a price when foreclosure occurs. Lenders, loan servicers, and mortgage insurers all lose money when homeowners lose their houses.

• A Family Housing Fund evaluation of a Minnesota foreclosure prevention program estimates that each foreclosure results in total costs of $26,600 to $73,300 for the homeowner, lender, servicer, mortgage insurer, and others.

• For comparison purposes, a typical low- to moderate-income homebuyer in Indiana currently incurs an average original mortgage of approximately $91,000. This would suggest that foreclosure costs may range from 29 percent to 80 percent of the original home loan.

Solutions and Cost Savings

Fortunately, there are cost-effective methods to help homeowners avoid foreclosures and remain in their homes. Numerous studies have demonstrated that a comparatively small investment in homeownership counseling can reap substantial savings by preventing defaults and foreclosures.

• A Freddie Mac study of nearly 40,000 mortgages found that pre-purchase homeownership counseling reduced 90-day delinquency by 19 percent as compared to borrowers with similar characteristics who did not receive counseling.

• A 2002 Ohio State University study found that pre- and post-purchase counseling reduced default by 50 percent.

• Multiple studies have found that post-purchase counseling, emergency assistance, and/or loss mitigation avert up to 60 percent of foreclosures and save a minimum of $15,000 per mortgage in foreclosure costs for homeowners and the lending industry.

• At Indiana's current rate of foreclosure, similar prevention strategies would cost $5 million, would save at least $22.5 million per year, and would preserve the housing assets of 1500 low-income households.