How many people should lose their homes to foreclosure?

In an ideal world, of course, there would be no foreclosures at all. Everyone who buys a home would get one that fits their income and needs, and people would have enough money to make their mortgage payments on time and in full. But in a housing market built on debt, foreclosures are a painful reality. People lose their jobs or fall behind on payments, and lenders repossess the home to recoup their losses.

Too many foreclosures is obviously a bad thing — losing a home is devastating both financially and emotionally — but it's also a problem to have too few foreclosures. Low rates of foreclosure activity signal that housing lenders aren't taking enough risk, locking out hopeful buyers who could have kept up with payments on their mortgage if only lenders gave them the chance.

Most residential loans are backed by the government-sponsored enterprises Fannie Mae and Freddie Mac or the Federal Housing Administration. To try to find a happy medium of risk, the GSEs — government-sponsored enterprises — and FHA set a "credit box" to determine who gets a mortgage. The companies base these standards on factors including the borrower's financial stability and the state of the housing market and economy. When the credit box gets tighter, fewer people get mortgages, and foreclosures generally go down. When it opens up, banks take more risks on people with lower credit scores or worse financial histories, increasing the possibility of foreclosures.

Finding the right size for the credit box is easier said than done. In the years leading up to the Great Recession, banks and private lenders handed out millions of risky loans to homebuyers who had no hope of repaying them. A tidal wave of foreclosures followed, plunging the US housing market — and the global economy — into chaos.

Original article here.