In a 58-page study released yesterday, the Center for Responsible Lending (CRL) predicts that some 2.2 million sub-prime borrowers will lose their homes to foreclosure in the coming years, forfeiting over $164 billion in household wealth in the process.
Entitled "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners," the extensive report analyzes the performance of more than six million subprime mortgages from 1998 through the first quarter of 2006. The study is the first comprehensive look at the subprime market.
The conclusions are startling, to say the least.
"We project that one out of five (19%) subprime mortgages originated during the past two years will end in foreclosure," said the report. "This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the ‘Oil Patch’ disaster of the 1980s."
Among the nonprofit group’s key findings:
- Subprime foreclosures have been high even in the face of strong housing appreciation. As many as one in eight subprime loans ended in foreclosure within five years of origination.
- The housing boom masked the high numbers of troubled subprime borrowers. Rapid price appreciation enabled many borrowers to refinance despite being months behind on their mortgages. When these distressed refinances are added to the totals, the failure rate from these loans is 25%.
- Subprime foreclosures will rise as housing prices decline. Lack of equity will trap distressed borrowers, cutting off their ability to refinance.
- The risk of foreclosure doubled from 2002-2005. Loans originated in 2002 had a one in ten chance of foreclosure, while those completed in 2005-2006 had a one in five chance of failure.
- Multiple subprime loans boost foreclosure risk even higher. When distressed borrowers refinance into to subsequent subprime loans, they often boost their loan amount, increasing their overall risk.
Compounding this slippery slope for subprime borrowers, the report says, are risky programs, loose underwriting, inadequate oversight and predatory lending.
The report also takes "third party originators" (mortgage brokers) to task, saying that brokers, who originate the majority of subprime loans, have little reason to consider the long-term consequences. The report cites brokers who steer subprime borrowers into loans with both higher rates and risks in order to earn higher commissions for themselves.
The result, according to the CRL, is that mortgage brokers are able to distance themselves from foreclosure, thus limiting their risk and encouraging them to close as many loans as possible.
And naturally the most ill-equipped borrowers are the ones who are most at risk.
"In the subprime sector, the most vulnerable borrowers are sold the most dangerous loans," said Mike Calhoun, CRL president. "At $164 billion, the losses from foreclosures could pay for the college educations of four million kids. For families who lose their houses because their loans fail, savings and economic security will be way out of reach."
The banking debacle continues.
Please tell me where I can read more about the U.S. banking debacle that you say is imminent. Are there any books about this, or is all the information so recent that it can only be found online?
As readers of this column have recognized, I believe that the housing bubble was caused primarily by lenders so greedy and eager to make a profit that they threw all of the old and time-tested rules of lending out the window. Because of this, the housing bubble is only a secondary story in the tale of the lending excesses that made it all possible.
And now that the mainstream media have finally arrived on the scene and begun to conclude that the housing bubble does in fact exist, it is only a matter of time before the light of day exposes these mortgage excesses for what they are.
In fact, it is already happening. You may not have seen these types of stories in the mainstream press. As with the housing bubble story, the mainstreamers are a little late to the scene.
The best place to keep current on these developing banking stories is on the web.
I recommend the following sites:
Ben’s Housing Blog http://thehousingbubbleblog.com/. Great info from newspapers all across the country. This site also provides a link to his foreclosure report.
HouseBubble.com http://housebubble.com/. Another great site for stories you won’t see in the mainstream press. They also provide links to other good sites such as Paper Money, Housing Panic, and Calculated Risk. Lots of good local links, too.
So while the first banking debacle books have yet to be published, the web is where you need to go to keep up to date.
The truth is out there, if you’re willing to look.
By the way: Phillip D. Thomas was sentenced on Monday to two years in federal prison and ordered to pay restitution in the amount of $6 million for his part in a mortgage fraud conspiracy.
Thomas performed fraudulent appraisals on some 177 properties as part of a conspiracy that encouraged its victims to obtain loans and buy real estate. Thomas inflated appraisals and falsified documents in order to fool lenders into approving loans that later collapsed, costing them millions.
Thomas is just the tip of the iceberg in white collar mortgage crime. There will be many more to follow.
Also, according to figures released yesterday, new housing permits continue to fall nationally as well as locally. At the national level, single-family housing permits fell 3.1% in November from October and were down 33% year over year.
Laughably, the kool-aid drinking mainstream press reported that the tiny uptick in starts may have signaled a housing recovery. They couldn’t be more wrong.
The bottom in housing is nowhere in sight.
Wishing you happiness, health, and wealth,
Steve Christ, Editor
The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at email@example.com.