FEDERAL RESERVE BANK: Foreclosure Delay and the U.S. Labor Market

Mortgage foreclosure delays during the Great Recession improved job match quality, homeownership retention and national income

Kyle F. Herkenhoff
University of Minnesota
Lee E. Ohanian
Federal Reserve Bank of Minneapolis


The time required to complete a home foreclosure rose substantially during the Great Recession, due both to lender bottlenecks in processing foreclosures and to government policies intended to slow the foreclosure process. This paper shows that foreclosure delay had the unintentional benefit of giving unemployed homeowners additional time to search for high-paying jobs.

Our economic model analyzes foreclosure delay as equivalent to extending additional credit to unemployed homeowners that is paid back if the homeowners find jobs and fulfill their delinquent mortgage obligations before foreclosure is completed. Model simulations estimate that foreclosure delay during the recession improved the quality of new employment matches, raised national income by about 0.3 percent and increased homeownership by about 800,000 units.


The collapse of the U.S. housing market, massive financial crisis and subsequent Great Recession led to a record increase in home foreclosures between 2007 and 2011, as job loss and a tightening mortgage market pushed many households into default. By 2009, roughly 2.8 million homes were in the foreclosure process, compared with about 700,000 homes in foreclosure before the recession (RealtyTrac 2009). Roughly one of 45 homeowners received a foreclosure notice in 2009.

This large increase in mortgage default was accompanied by a large increase in time required to complete the foreclosure process. Before the recession, it took about nine months on average to complete a residential foreclosure. By 2010, the average time had increased to about 15 months, and to more than two years in states such as Michigan, New Jersey and Florida.

This increase primarily reflected two factors. First, the sheer volume of foreclosed properties created foreclosure processing bottlenecks for lenders and courts. Second, several government policy responses slowed the foreclosure process. Policies to keep defaulting homeowners in their homes included federal mortgage modification programs that required a halt to the foreclosure process until a lender evaluated a borrower’s modification request (see Mulligan 2010). Other policies also delayed foreclosure, such as the National Mortgage Settlement Act.

The positive effects of foreclosure delay

Foreclosure delay policies were considered an effort to help distressed homeowners by providing continuity for families and additional time to reorganize their affairs. But our analysis and new data reveal other positive effects. In a recent working paper for the National Bureau of Economic Research, we analyze how delays enhance the prospects of unemployed homeowners for finding better-paying jobs (Herkenhoff and Ohanian 2015). The analysis is based on two premises: (1) that unemployed homeowners would like to remain in their homes, but may not be able to pay their mortgages while unemployed, and (2) that lenders prefer not to foreclose on a home, since foreclosure is a costly process that often results in sizable losses for the lender.

By contrast, lenders benefit considerably when a delinquent homeowner is able to pay back previously missed mortgage payments. In this event, the lender not does not incur the cost of foreclosure processing and potentially taking a loss on the property; the lender also receives late fees on delinquent payments. This process in which a delinquent mortgagor pays back previously missed mortgage payments is known as curing, and it occurs frequently. In fact, our research documents that roughly half of all mortgagors who are in foreclosure successfully exit foreclosure through curing.

We find that foreclosure delay was also important for other reasons, particularly for unemployed homeowners, because job creation remained far below normal during the Great Recession. The job creation rate—the number of hired workers in a month relative to the total number of individuals working in that month—fell by almost half during the recession. Low job creation lengthened average unemployment substantially, as a large pool of job seekers, many of whom lost their jobs during the recession, were competing over a relatively small number of job openings.

While low-paying jobs may be easy to find, it can take a long time for a job seeker to find a high-paying job well-suited to his or her specific skills and experience—even in a vigorous economy. This suggests that the time to find a high-paying job during the recession rose substantially relative to a normal economy. Foreclosure delay gives unemployed homeowners time to search for high-paying jobs that match their skills, rather than feeling forced into low-paying jobs to prevent impending foreclosure.

Our research views this foreclosure delay as an implicit credit line from lender to borrower. Specifically, missed mortgage payments are an implicit loan to the borrower, and late fees are the implicit interest payment to the lender. The credit line is closed if the homeowner cures, or runs out if the homeowner does not cure and foreclosure is completed.

Full paper below…




Foreclosure Delay and the U.S. Labor Market