Final answer:
Foreclosure is a legal action taken by lenders to recover loan balances from defaulting borrowers by selling their property. This process was highlighted during the housing crisis and arises from both personal and business loans that are not repaid.
Step-by-step explanation:
A foreclosure is a legal process where the lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the home. Just as individuals may take out loans for personal use such as buying a car or a house, firms also borrow money promising to repay it with interest over a predetermined period. If the firm, or individual, fails to make the required loan payments, the lender can initiate legal action to sell the borrower's property, such as buildings or equipment in the case of a firm, or a home in the case of a personal loan, in order to recover the outstanding loan balance.
This process became particularly relevant during the housing crisis when many borrowers found themselves with homes worth significantly less than the amount they owed, leading to widespread foreclosures. Also, changes in finance and banking laws allowed for riskier lending practices where loans could be securitized and sold off, further disconnecting the consequences of borrower defaults from the initial lenders. In the primary loan market, loans are originated, and in the secondary loan market, they are bought and sold.