The Center for Responsible Lending predicts that one of five subprime mortgages originated in the past two years will end up in foreclosure, and that as many as 2.2 million households have already lost their homes or will end up in foreclosure in the next several years.
The center says it analyzed the performance of more than 6 million subprime mortgages going back to 1998 for its report, “Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners.”
The report claims the chance of foreclosure on a subprime loan doubled between 2002 and 2005, with subprime loans originated in 2002 having a 10 percent chance of foreclosing over the life of the loan, compared with a 20 percent chance of subprime loans closed in 2005 and 2006.
The center is a nonprofit, nonpartisan research and policy organization that is affiliated with Self-Help, a community development financial institution.
Rather than serving as a stepping-stone to a prime loan, many borrowers refinance into another subprime loan when their interest rates adjust, the report said. Borrowers who repeatedly refinance face a 36 percent chance of losing their homes to foreclosure, the study found, adding that more research is needed.
The National Association of Realtors this week participated in a conference call with representatives of the Center for Responsible Lending and the Leadership Conference on Civil Rights, urging consumers to make sure they understand the risks and rewards of all types of mortgages before they make a decision on a loan. NAR and the Center have produced a series of brochures for consumers to educate them about nontraditional and traditional mortgage products.
But the Mortgage Bankers Association disputed the findings of the Center for Responsible Lending’s report, saying it distorts statistics. MBA Chief Economist Doug Duncan told the group’s members that foreclosures occur in good times and bad, and that while there has been an uptick in delinquencies and foreclosures, part of the reason is the increased number of borrowers.
The latest MBA National Delinquency Survey showed the percentage of loans in the foreclosure process was 1.05 percent of all loans outstanding at the end of the third quarter, up six basis points from the second quarter of 2006 and eight basis points from the same time last year. The foreclosure inventory rate for subprime loans increased 30 basis points to 3.86 percent, while prime loans saw a more modest 3-basis-point increase to 0.44 percent.
Delinquency rates were up across all loan types. The delinquency rate for prime loans increased 15 basis points to 2.44 percent, while subprime delinquency rates were up 86 basis points to 12.56 percent.
When the MBA survey was released last week, Duncan said the increase in delinquency rate for subprime loans was not surprising, “given that subprime borrowers are more likely to be susceptible to the cumulative increases in rates we’ve experienced, and the slowing of home price appreciation that has resulted.” Duncan argued against tighter regulations on lenders, saying market forces are already curbing the use of nontraditional loans such as interest-only or payment-option mortgages.
The recommendations in the Center for Responsible Lending’s report include expanding recently issued federal guidelines for interest-only and payment-option loans to all types of subprime loans and nontraditional mortgage products, and requiring that the guidelines apply to all lenders, not just federally chartered banks.
The federal guidelines, issued in September, tighten underwriting standards and require more complete disclosure of terms of loans that allow borrowers to defer repayment of principal and sometimes interest. The guidelines have since been adopted by 20 states, according to the Conference of State Bank Supervisors.