A second study forecasting millions of foreclosures sweeping the nation in the next few years, says it won't matter what the Feds do to fix the problem.
"Foreclosures Will Affect 2 Million Homeowners," by upstart housing market researcher HousingPredictor.com says subprime mortgages are the culprit.
Among the independent researcher's findings:
- More than 2 million homeowners will face foreclosure in next two and a half years, due largely to loans written that shouldn't have been.
- Most, 76 percent of recent foreclosures resulted from high-interest rate subprime loans made to borrowers who could not otherwise qualify for a loan.
- Another 15 percent of the failed loans were made with conventional mortgages, but many contained risky low- or no-down payment terms.
- The remaining 9 percent of foreclosed loans studied included no- and low-documentation loans that get approved with little if any verification of income.
- More than 50 percent of all home mortgages made in 2006 were written with 5 percent or less down.
"The figure is particularly significant since mortgages like this were nearly impossible to obtain except by those with excellent credit histories and strong incomes until two years ago," said Mike Colpitts, editor of HomePredictor.com.
Colpitts says the study is based on a survey of 100 real estate market's public records and interviews conducted by researchers.
Late last year, the five-year-old Center for Responsible Lending's report on the matter, "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners" used a proprietary loan-level dataset of more than six million securitized subprime loans and determined 2.2 million homeowners have either already lost the farm or will by 2008, due to subprime loans.
The center has long called for stiffer federal rules to govern the risky loans.
Rebutting the Losing Ground study, "U.S. Mortgage Borrowing: Providing Americans with Opportunity, or Imposing Excessive Risk?" a study by the four-year oldCenter for Statistical Research (CSR) says stiffer rules could push from 580,000 to 1.1 million borrowers out of the market and leave as much as $188 billion in mortgage money in the bank.
The CSR study used mortgage origination data from "several major financial institutions" and was funded by the American Financial Services Association (AFSA), a group of industrial banks, auto finance institutions, mortgage lenders, finance companies, credit card issuers and others providing credit to consumers and small businesses.
"There is some evidence that if the Fed doesn't drop rates by the end of the year, we'll be in a crisis," Colpitts said.
The Fed is busy with regulatory matters.
- The Federal Reserve Board has set June 14 for fifth public hearing on the Home Ownership and Equity Protection Act (HOEPA) frequently called upon to curb abusive lending practices.
- The hearings come after months of related testimony before Congress from industry and government officials, as well as consumer advocates.
- Also making the rounds, is the "Proposed Statement on Subprime Mortgage Lending" by the same group of federal monetary regulators that rewrote the rules on nontraditional home loans and equity loans.
- Those rules, "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending" were years in the making and some lenders not federally regulated slipped under the radar.
Less regulated state level lenders are, in part, why there's more regulatory action to attempt to manage the mortgage morass.
Colpitts says it won't matter if stiffer rules are written or if no rules are written.
"The consensus among economists is that the Feds just haven't acted fast enough to do anything. If they do anything, it will be too little too late," he says, comparing the current home loan landscape with the savings and loan scandal of the late 1980s and early 1990s.
But comparing the bail out then with the fury of foreclosures now is a lot like comparing prime mortgages with subprime mortgages.
There are a few similarities between the two events, but they include fraud, foreclosures and an economic drain.
Today, by and large, the soaring rate of foreclosures is more directly associated with poorly underwritten loans.
According to "An Examination of the Banking Crises of the 1980s and Early 1990s" by the Federal Deposit Insurance Corporation, which was spawned of another era of bank failures, during the bailout, layers upon layers of bad investing and poor banking habits were exacerbated by true real estate depressions in the Southwest, California, Florida and the Northeast.
One of the first responses to the problems then actually came with deregulation, not more regulations, as are on the drawing board now.
And, with the current administration and U.S. Congress preoccupied with a national election, immigration and a war potentially costing the economy more than $2 trillion, failing lenders will be hard fought to find anotherhalf trillion dollar bailout cache -- the estimated cost of the bailout.
