Source: nytimes.com (The New York Times)

Ever since the housing boom began to cool in 2006, an increasing number of homeowners have fallen into foreclosure; that is, have lost ownership of their home or been threatened with it because of a failure to keep up with their mortgage payments. That rise in foreclosure is behind all the trouble that has wracked Wall Street ever since.

The foreclosure wave has also battered cities where subprime mortgages had been prevalent, since foreclosure sales can drive down the value of homes in the surrounding area, thereby making further foreclosures more likely. And falling property values have sharply eroded the tax base of some areas, forcing spending cutbacks by state and local governments already hurting from the general economic slowdown.

By June 2008, about 2.75 percent of all home loans, or about 1.75 million mortgages, were in foreclosure, up from 2.47 percent in March. Another 4.58 percent of homeowners were behind on their payments, a slight decrease from March. Foreclosure rates were highest in California, Florida, Michigan, Nevada and Ohio.

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Housing experts say that many of those who fell behind on their mortgages did so because they bought subprime mortgages that they eventually could not afford, either because the interest rate jumped after an initial low period or because its cost was higher than they were led to believe. Others lost their ability to keep up with their payments when they lost a job; while some simply paid more for a house than they could afford. And some subprime or so-called Alt-A mortgages -- contracts that skipped over many of the safeguards usually in place to weed out credit risks -- were taken out by speculators who simply walked away when the homes they bought became worth less than they had paid for them.

The woes of these homeowners turned into catastrophe for Wall Street through the practice of securitizing mortgages -- bundling thousands of them together into a financial instrument much like a bond. Because default rates had long been low, mortgage-backed securities were considered safe. But as foreclosures rose the value of the securities dropped, since the revenue stream from interest payments diminished.

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