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December 19, 2006
Foreclosure: How Big a Risk?
A study out today from the Center for Responsible Lending predicts that subprime borrowers are going to lose their homes to foreclosure on a massive scale. Looking at more than 6 million subprime mortgage loans issued from 1998 through September of this year, the study calculates that 2.2 million households have either already been foreclosed on or will be foreclosed on in the next few years.
These foreclosures, it says, will cost homeowners around $160 billion in wealth, mainly in the form of lost equity. The foreclosure rate will be highest on homes that were sold at the peak of the market, it says, because prices on those homes have fallen, meaning people will have a harder time bailing out of distressed loans by refinancing or selling their homes for a profit.
Is this study accurate? How worried should we be?
The Center for Responsible Lending is an arm of the Center for Community Self-Help, a Durham (N.C.) non-profit organization operating primarily in North Carolina that makes mortgage loans as well as loans to small businesses. It serves the same kinds of clients as subprime lenders do, so you could argue that its report is just a criticism of the competition.
To their credit, the study's authors--Ellen Schloemer, Wei Li, Keith Ernst, and Kathleen Keest--aren't just plucking numbers out of the thin blue sky. Their methodology resembles one used by Anthony Pennington-Cross, a senior economist at the Federal Reserve Bank of St. Louis. Here's a link to something Pennington-Cross wrote on this topic earlier this year.
Naturally, though, the overlap in methodology doesn't mean Pennington-Cross agrees with the findings of this study.
The Mortgage Bankers Association says it thinks the study is too pessimistic. In an interview with me, Chief Economist Douglas Duncan said that he doubts that housing prices will fall considerably in 2007, which is the assumption the study uses, based on a report by Moody's Economy.com. He also said the foreclosure rates to date reported by the Center for Responsible Lending are higher than the ones that the Mortgage Bankers Association has seen, leading him to ask questions about the source of their data.
One oddity of the study is the estimate that people who get foreclosed on stand to lose over $160 billion in equity. The obvious question: If you have a lot of equity in your house and you're having trouble making payments on the mortgage, why wouldn't you just sell the house yourself, pay off the loan, and keep the equity? I asked Mike Calhoun, the president of the Center for Responsible Lending, that question. His answer:
"Yes, they should sell. But most people put that off until the last minute and hold on as long as they can. There are not that many borrowers who are able to make the rational decision to sell and go rent. Most keep refinancing as long as they can."
While acknowledging that many borrowers bear part of the blame for their own predicament, Calhoun says that subprime lenders are wrong to "push" loans with low teaser rates that borrowers don't understand. The main losers from foreclosures aren't the lenders but the borrowers, he says. "There?? a high human cost of foreclosure and in our view an unnecessarily high cost."
Economy, Foreclosures, Mortgages
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Don't let scumbags to lure you in with interest only or some other tricks. We are responsible for our decision..
Similar to retail market. House Sellers inflate price up to 100%, then drop price 20-60%, to attract Buyers.
Buyers do not get a bargain. They dig their own graves for the next 30 years.
Posted by: Charles Tran at December 20, 2006 12:01 AM
What has happened to the greatest democracy in the world? Who are American politicians representing? When I was in the States in the 70s consumer protection laws were quite strong. Usury was absolutely illegal - yet in 2006 some credit card companies get away with 30%+ interest plus unreal fees and charges. I read that 1/3 of Americans getting a mortgage get ripped off. When I went to the bank in 1974 and asked for a mortgage I received exactly the same deal as the next Joe. Now, only the highly informed get a good deal. When I paid off my mortgage early in 1977 I was not penalized - something that surprised me - but was a consumer protection law at the time. Now most mortgage contracts have stiff penalties for early repayment. What happened to the USA?
Posted by: William Hightower at December 20, 2006 10:39 AM
What happened is that the politicians have been bought lock, stock and barrel by the banking interests. Witness the recently passed bankruptcy law, as well as the ridiculously high interest rates on credit cards in a low interest rate environment.
"Greed is good.' from Michael Douglas' character "Wall Street". That is the mantra of the banks and the politicians. Screw the consumer.
Posted by: Bill T. at December 21, 2006 12:12 PM
In answer to your question about what happened to the USA...Bush/Chenney
Posted by: USA WHAT HAPPENED at December 26, 2006 02:16 PM
Isn't everything Bush's fault. Who ya' gonna' blame when he's gone? Huh? You're silly.
Posted by: Barb at May 14, 2007 12:42 PM