Just the Facts: A Look Back at the Role of Federal Courts in the Foreclosure Crisis

Immediately following the Great Recession, foreclosure filings reached peak levels, but have since receded to pre-recession levels. Foreclosure filings in federal courts followed a similar pattern, but one lagging the pattern of state filings.

Background

The adverse economic effects of the Great Recession of December 2007 to June 2009 caused filings in U.S. district courts to increase in several categories, including civil case filings related to foreclosures. The number of federal foreclosure proceedings rose 82 percent from calendar year 2006 to calendar year 2012 and represented 61 percent of all real property cases filed in federal courts in 2012. Although federal courts heard only a small number of cases compared to state-level foreclosure events, the increase in foreclosure caseload demonstrated that federal judges also played a role in adjudicating foreclosure cases during this period of economic decline. This article examines foreclosure case activities in U.S. district courts during the Great Recession and the subsequent recovery period.¹

The Great Recession marked the longest period of economic downturn in the United States since the Great Depression of the 1930s.² As occurs with all recessions, this period was accompanied by higher rates of unemployment and decreased economic activity.³ These conditions diminished total purchasing power and consumer demand and prevented borrowers from paying off debt.

In the early 2000s, credit conditions allowed borrowers to assume low-interest mortgages under relaxed conditions. Creditors furnished risky investments, such as subprime mortgages, which allowed individuals with unknown or low credit score histories and inadequate income to support the mortgage payments to take on mortgages with high risks of default. Consumer demand fueled an increase in housing prices, creating a housing bubble, during which house prices continued to escalate.⁴ Demand inevitably slowed and the market could no longer sustain inflated prices, causing the housing bubble to burst and property values to decline. Along with a recession that resulted in job losses, many borrowers were underwater and unable to refinance or sell. As borrowers increasingly defaulted on their mortgages, creditors initiated foreclosure proceedings.

In a foreclosure proceeding, a mortgagee (i.e., the creditor) attempts to recover the loan balance from a mortgagor (i.e., the borrower) who has defaulted on the mortgage by taking possession of the property.⁵ Most foreclosure proceedings are governed by state laws, and the foreclosure process differs somewhat from state to state. Two paths exist for foreclosures: judicial and nonjudicial foreclosures. In states that have adopted judicial foreclosure – 45 states favor judicial foreclosure, but only 20 solely use this practice – the plaintiff (typically the lending institution) files a case in state court. In states that make nonjudicial foreclosure available, the lender (or mortgage servicer) tries to recover the loan balance by serving the borrower with a notice of default, and if no money is recovered, an auction is conducted.⁶

The federal courts hear foreclosure cases when they involve a question of federal law (e.g., multifamily mortgage foreclosure remedies⁷) or diversity of citizenship (i.e., when the opposing parties are citizens of different states or one party is a citizen of a foreign country).⁸ Before the Great Recession, the majority of federal foreclosure cases involved diversity of citizenship. However, during and after the Great Recession, the majority of the courts’ civil foreclosure filings fell into the category of federal question cases. Parties may also request to have their cases removed from state court to federal court when they assert federal question or when diversity of citizenship of the parties exists. Following the Great Recession, some parties in foreclosure proceedings removed their cases to federal court based on claims of predatory lending practices.⁹

Facts and Figures

Real Estate Prices, Total Foreclosure Actions, and Foreclosure Filings in U.S. District Courts

• As the housing bubble burst, housing prices fell 17.8 percent from 2006 to 2009 (adjusted for inflation), accelerating subprime mortgage defaults and, in turn, the number of foreclosure filings.¹⁰
• In 2008, roughly one of every 54 households received a foreclosure notice.¹¹ In that year alone, 861,664 households lost their properties due to foreclosure.¹²
• The number of properties in the United States associated with judicial and non-judicial foreclosure actions rose from 532,833 in 2005 to a peak of 2.9 million in 2010, then began decreasing and reached 624,753 in 2018. Foreclosure actions included default notices, scheduled auctions, and bank repossessions.
• Foreclosure filings in U.S. district courts showed a pattern similar to those at the state level, although with a two-year lag. Foreclosure filings in the U.S. district courts peaked at 7,810 in 2012, then began declining and totaled 3,037 in 2018. However, despite the drop in federal foreclosure actions, filings have not reached pre-recession levels as of the end of 2018 (Figure 1).

Jurisdiction of Filings and Filings by Private Lenders

• Prior to the Great Recession, lenders primarily filed federal foreclosure cases based on diversity of citizenship of the parties, for which federal courts applied the laws of the states in which the actions were filed. As the number of foreclosures grew during the recession, borrowers and lenders/servicers came to rely heavily on federal question actions in which federal law is applied. Between 2008 and 2010, federal question made up 57.6 percent of private foreclosure cases in U.S. district courts. After the recession, 2010 and onwards, most foreclosure filings again fell predominantly into the diversity of citizenship category (cases involving parties from more than one state must be filed in federal court). During the peak of the recovery in 2012, diversity of citizenship formed the basis of jurisdiction in 70.5 percent of private foreclosure cases in which both parties were private citizens or entities (most often, a lending institution and the borrower). (See Figure 2.)
• As the overall volume of foreclosure filings rose from 2008 to 2012, so did the percentage of private cases. In 2006, prior to the Great Recession, the U.S. government was either the plaintiff or the defendant in 58.8 percent of federal foreclosure cases. At the peak of the recovery in 2012, however, 90.1 percent of federal foreclosure cases were private cases in which both parties were private citizens or entities. The share of private cases declined to 75.5 percent in 2018 but did not reach pre-recession levels (see Figure 3).

Geographic Variation

• Although the foreclosure crisis affected virtually every area of the country, the number of foreclosure filings varied by location. In 2012, U.S. district courts received anywhere from one to 1,374 foreclosure filings (courts in more densely populated areas saw more filings, on average). The Northern District of Illinois processed the largest number of federal foreclosure cases (1,374 filings). The Central District of California and the Northern District of Georgia also had substantial federal foreclosure caseloads that same year, at 903 filings and 762 filings, respectively (see Map 1).
• The District of Puerto Rico experienced a surge in foreclosure filings in 2016, when the 1,108 federal foreclosure cases it received represented nearly 50 percent of its total civil caseload (see Figure 4).¹³ The increase in cases is partly attributable to the expiration of moratoriums prohibiting foreclosures and other legal actions following Hurricane Maria in mortgages underwritten by federal agencies such as the Department of Housing and Urban Development and the U.S. Department of Agriculture.¹⁴

Figures and Map

Note: Click on the tabs below to view the figures and map.

¹  While this article focuses on case activities in the U.S. district courts, case activities in the U.S. bankruptcy courts were also impacted by the Great Recession and the resulting foreclosure crisis.  The impact on the U.S. bankruptcy courts is beyond the scope of this article.

² The Great Recession’s contraction (i.e., the period of time of economic decline) lasted 18 months, which was significantly shorter than the contraction of the Great Depression, which lasted 43 months. See National Bureau of Economic Research’s Recession Dating. Retrieved from https://www.nber.org/cycles.html.
³ https://www.frbsf.org/education/publications/doctor-econ/2007/february/recession-depression-difference/
⁴ Levitin, A.J. and S.M. Wachter (2010). “Explaining the Housing Bubble.” Business, Economics and Regulatory Policy Working Paper Series, Research Paper No. 1669401. Retrieved from http://realestate.wharton.upenn.edu/wp-content/uploads/2017/03/689.pdf.
⁵ The Law Dictionary, Foreclosure. Retrieved from https://thelawdictionary.org/foreclosure/.
⁶ The Law Dictionary, Mortgage Law. Retrieved from https://thelawdictionary.org/article/mortgage-law-judicial-vs-non-judicial-foreclosure/.
⁷ See the Multifamily Mortgage Foreclosure Act (codified at 12 U.S.C §§ 3701-3717), creating a uniform Federal Foreclosure remedy for multifamily mortgages.
⁸ If a party is a corporation, as is often true of mortgage lenders in foreclosure proceedings, it is a citizen of the state where it is incorporated or is doing business. See 28 U.S.C §1332 (diversity of citizenship statute) and Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938) (holding district courts in diversity jurisdiction cases must apply the law of the states in which they sit).
⁹ Wechsler, M. “Challenging Foreclosure and Predatory Lending Practices.” Retrieved from https://www.thelaw.com/law/challenging-foreclosure-and-predatory-lending-practices.240/. Levitin, A.J. and S.M. Wachter (2010). “Explaining the Housing Bubble.” Business, Economics and Regulatory Policy Working Paper Series, Research Paper No. 1669401. Retrieved from http://realestate.wharton.upenn.edu/wp-content/uploads/2017/03/689.pdf.
¹⁰ U.S. Census Bureau’s Median Sales Price Data for New Houses Sold in the United States. Retrieved from https://fred.stlouisfed.org/series/MSPNHSUSA.  
¹¹ RealtyTrac, U.S. Real Estate Trends & Market Info, Foreclosure Trends. Retrieved from https://www.realtytrac.com/statsandtrends/foreclosuretrends/
¹² Id.
¹³ U.S. Courts, Statistical Tables for the Federal Judiciary, Table C2. Retrieved from https://www.uscourts.gov/statistics-reports/caseload-statistics-data-tables
¹⁴ New York Times article. Retrieved from https://www.nytimes.com/2018/07/15/business/puerto-rico-hurricane-foreclosures.html.