Final answer:
In foreclosure, the order of debt payments typically starts with the cost of selling the property, followed by the outstanding mortgage balance, then any second or junior liens. If any funds remain, they may go to the homeowner. The housing bubble burst led to widespread foreclosures and financial strain on banks, homeowners, and local governments.
Step-by-step explanation:
When a homeowner like Brett faces foreclosure, there is a typical order in which debts are paid after the property is sold at auction. The process involves several steps and prioritizes certain debts over others. First, the cost of selling the property, including auction fees and legal costs, is paid. Following this, the outstanding mortgage balance to the primary lender is addressed. If there are any second or junior liens, such as second mortgages or home equity lines of credit, they are paid next. Any remaining funds after satisfying these debts may then be disbursed to the homeowner. In some cases, if the sale does not cover the mortgage balance, the lender may pursue a deficiency judgment against the borrower for the remaining amount.
The housing bubble burst and subsequent financial market crisis led to a cascade of foreclosures. Government initiatives like the American Restoration and Recovery Act aimed to alleviate some of the stress on homeowners and the market by providing tax credits for homebuyers among other measures. When property values dropped, many homeowners found their mortgages underwater, leading to increased foreclosures and substantial losses for banks, homeowners, and local government tax revenues. For example, Detroit famously filed for bankruptcy in the wake of these issues.