In the past, foreclosures were caused by households running into serious problems, such as health issues or divorce. Defaults weren't caused by loan structural issues, such as low teaser rates, but rather by unpredictable and unavoidable family crises.

Prior to the easy availability of mortgage money, foreclosures were relatively rare. Today it’s not unusual for a borrower to be foreclosed within months of moving into a house. Now, foreclosures are largely the result of a declining housing market and risky lending practices.

[Knowing your credit score is of paramount importance. ]

Traditionally, a homeowner lived in a house for years, gradually accumulating substantial equity. This equity was built up both by paying down much of the mortgage and by the naturally rising value of the house. Along with a balanced housing market, equity enabled a homeowner to sell their house quickly when necessary, keeping foreclosures at a minimum.

Past performance is not an indication of future success – especially in the real estate market.

In the recent past, of course, skyrocketing home prices created fortunes. Houses bought and then sold just months later brought thousands of dollars profit. Homeowners and lenders assumed risky loans because both believed prices would continue to climb.

Lenders made loans with low or zero-down payments and low “teaser” interest rates. They often made loans based only on credit scores and undocumented income. Such creative financing enabled millions of otherwise unqualified families to buy homes.

Borrowers and lenders rolled the dice-—placing bets that home prices would continue to rise. Perhaps you rolled the dice—reasoning you could quickly find a buyer if necessary. You envisioned a sale as a sure way to get out of your mortgage and to make a profit as well. Your lender was confident the rapidly rising housing market would make your house more valuable which could make foreclosure profitable.

Homeowners are increasingly unable to sell their property to escape unaffordable loans, and lenders who foreclose are losing up to 50% of the loan value because of lower home prices.

According to the Federal Reserve, the inability to resell property has more affect on the foreclosure crisis than lowered credit standards.

A form of adjustable rate mortgage that gets many subprime borrowers into trouble is the “exploding ARM.” (An adjustable rate mortgage has an interest rate and payment adjusted as often as every month.)

An ARM “explodes” if the interest rate increases substantially after the first two or three years. The rate may reset at much higher levels that, often exceeding 10 percent or more. (The initial interest rate on an ARM is set artificially low and below market, and is designed to entice the borrower to enter in the loan).

A Nevada family situation illustrates the problem with an exploding ARM. The family bought a house in 2004 for $369,000 with 100% financing. The mortgage terms called for an adjustment after the first 2 years of the note and then continued adjustments over the next 28 years. This is known as a “2/28.” The initial monthly payment was $1,334.55, but after 2 years it jumped to $3,121. The family could make the initial teaser payments with some difficulty, but they were unable to make the increased payment. Their home foreclosed four months after the first missed payment.

The Nevada family qualified for a low-interest loan based on “stated income.” These loans are known in the lending industry as “no-doc loans” or “liar loans.”

The family’s overstated income was enough to make payments based on the initial low interest rate offered, but their actual income was inadequate to make the higher payments and they lost their home.

In addition to subprime mortgages, lenders offered HELOCS (Home Equity Lines of Credit)which allowed homeowners to tap into their equity to continue making otherwise unaffordable mortgage payments. Recently, lenders have started reducing the amount of credit available on outstanding HELOC's. For instance, a homeowner with $100,000 available credit might receive a letter from their lender telling them that the available credit is reduced to $80,000. Cutting off this source of funds has also accelerated the number of foreclosures.