Evidence that federal plans to tighten the purse strings on subprime lenders may be too little too late, a non-profit consumer advocacy organization says 2.2 million subprime holders have either lost their homes this year or will face foreclosure in the next few years.
Citing more doom in an already gloomy housing market, "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners" released this week by the Center For Responsible Lending, is a grim analysis of more than 6 million subprime loans, originated from 1998 to 2004, totaling $1.2 trillion and representing 70 percent of the U.S. subprime market.
"The losses will inevitably have ripple effects throughout the economy and our society as over two million families lose their physical shelter, their major source of financial security, and the social benefits of homeownership," according to the first-of-its-kind report on subprime casualties.
The stark findings include:
- The 2.2 million subprime holders who lose their homes to foreclosure will lose as much as $164 billion, much of it in home equity.
- Approximately, one out of five (19 percent) subprime mortgages originated in the last two years will end in foreclosure, and go down as the worst foreclosure rate in modern mortgage market history.
- As many as one in eight (13 percent) subprime loans ended in foreclosure within five years of origination even during the recent housing boom.
- Equity gains from the housing boom masked subprime holders' struggle with the loans because they could refinance if they fell behind on their mortgage payments. These home owners had an even higher foreclosure rate nearing 25 percent.
- As housing prices decline, subprime foreclosures will rise. As the boom continues to cool, fewer delinquent borrowers will have the equity to refinance their way, albeit temporarily, out of trouble.
- The chance of foreclosure on a subprime loan doubled between 2002 and 2005. Subprime loans originated in 2002 have a one-in-ten lifetime chance of foreclosing. For loans originated in 2005 and 2006, the probability shoots up to one in five.
Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of their lack of credit or previous credit problems. They have been sold as an opportunity to achieve the American Dream for those who otherwise may have been locked out.
But some consumers were sold a bill of goods.
Many borrowers in the subprime market get hooked and refinance from one subprime loan to another, losing equity each time to cover the cost of getting a new loan. Serial refinancing boosts the likelihood of foreclosure to 36 percent.
Federal monetary regulators want to add subprime loans to the pool of mortgages with stricter regulations, but they could be moving too slowly.
The desire to further scrutinize the subprime market was one of the topics of discussion at Office of Thrift Supervision's recent National Housing Forum this week in Washington, D.C.
The office is a division of the U.S. Treasury and Treasury Secretary Henry Paulson said the government wants to issue guidelines to banks and savings and loans that will allow people to get the home loan they need but "without taking unnecessary risks."
Federal Reserve Chairman Ben S. Bernanke, speaking in early November at the Opportunity Finance Network’s Annual Conference in Washington, D.C. said in 1994, fewer than 5 percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime.
Indicating the positive impact of subprime availability he reported that from 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income group, the share of households with mortgage debt rose 53 percent.
Unfortunately, much of the growing level of foreclosures is coming from the subprime market.
In the 12 months through August this year, the default rate of subprime mortgages rose to 7.74 percent from 5.53 percent in the previous 12 month period, according to Friedman Billings Ramsey Inc., analysts who follow the securitized portion of the market.
Prime loan foreclosures, on the other hand, rose only 0.24 percent, a steady average since 2000, and up only from 0.16 percent from a year earlier.
Foreclosures on subprime mortgages climbed to 3.18 percent in the month of August, up from 2.16 percent in August 2005, FRB also says. For prime loans, the foreclosure rate rose only marginally from 0.06 percent to 0.09 percent during the same month.
Another analyst, UBS Securities, says subprime loans originated this year are going bad at a 50 percent higher frequency than those issued in 2005, which suggests looser underwriting standards.
And Standard & Poor's downgraded credit ratings on a record 132 residential mortgage bond issues last quarter, mostly due to poor performance of subprime loans.
