About one in five subprime mortgages made in the last two years are likely to go into foreclosure, according to a report released yesterday, ending the dream of homeownership for millions of Americans.

 
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The Complete Study (responsiblelending.org)

At that rate, about 1.1 million homeowners who took out subprime loans in the last two years will lose their houses in the next few years, the report said. The foreclosures will cost those homeowners an estimated $74.6 billion, primarily in equity.

The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody’s Economy.com. Researchers examined more than six million mortgages made from 1998 until the third quarter of 2006; the report is the first nationwide study on the performance of subprime mortgages. It includes projected foreclosure data for all major metropolitan statistical areas. The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C.

The report offers a somber assessment of loans that had helped millions of Americans with blemished credit attain homeownership. About 2.2 million borrowers who took subprime loans from 1998 to 2006 are likely to lose their homes.

Subprime loans are made to borrowers with unfavorable credit.

Mortgage companies, banks and investors began aggressively marketing and trading the loans in the early part of the decade because their higher interest rates make them more profitable.

As a result, subprime loans now make up more than a quarter of the mortgage market, more than $600 billion in 2005. “This is no longer a niche part of the market that can be dismissed,” said Keith Ernst, senior housing counsel at the research center and one of the authors of the report. “It’s a major component of the mortgage market and the growing rates of foreclosures should be a cause for alarm.”

The report cited several factors for the increase in subprime mortgage foreclosures — including adjustable rate mortgages with steep built-in rate and payment increases, prepayment penalties, limited income documentation and no escrow for taxes and insurance. The report said the features caused a higher risk of default regardless of the borrower’s credit score.

“This means that people are not going into foreclosure just because they have low incomes,” Mr. Ernst said. “The foreclosures are higher than they need to be because a number of loan features in the subprime market place borrowers at unnecessary risk.”

Minority homeowners take out a disproportionate share of subprime loans. The most recent Home Mortgage Disclosure Act data from lending institutions show that over half of African-Americans and 40 percent of Hispanics received subprime loans.

The report projects that 10 percent of the African-American borrowers and 8 percent of Hispanic borrowers will be affected by foreclosure. In contrast, only 4 percent of recent white borrowers are expected to be affected.

The center suggests that risky lending practices could lead to the worst foreclosure crisis in the modern mortgage market.

Douglas Duncan, chief economist for the Mortgage Bankers Association, called the center’s study overly pessimistic.

“Every forecast models makes assumptions, but it seems they picked the worst case scenario,” Mr. Duncan said.

Mr. Duncan said the banker’s association’s numbers did show an increase in foreclosures but that was because there were more borrowers.

The center’s report comes as more attention is paid to subprime lending. State regulators have cracked down on what they see as predatory practices by many lenders.

Federal regulators have issued new guidelines that will tighten lending standards, aiming chiefly at adjustable-rate mortgages. And the federal government, through the Federal Housing Administration, has attempted to reform its lending programs to better compete in the mortgage market.

The House has approved a proposal by the F.H.A. to eliminate the minimum down payment and raise the loan limits, allowing it to offer loans that would enable borrowers to avoid the risk of subprime mortgages.

Wade Henderson, president and chief executive of the Leadership Conference on Civil Rights in Washington, praised the proposed changes but said other efforts were needed.

“We need rules to curb predatory lenders, but we also need prime lenders to step up for this expanding market of borrowers,” Henderson said. “The lending community needs to step forward and take responsibility. It should not let itself be defined by its worst actors.”
http://www.nytimes.com/2006/12/20/business/20home.html?_r=1&oref=slogin