DURHAM, N.C. — Despite low interest rates and a favorable economic environment during the past several years, the subprime mortgage market has experienced high foreclosure rates comparable to the "worst foreclosure experience ever in the modern prime market," according to a new report released by the Center for Responsible Lending.
"Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners" also states that foreclosure rates will increase significantly in many markets as housing appreciation slows or reverses. It projects that 2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process. Many features of typical subprime loans substantially increase the risk of foreclosure, regardless of the borrower's credit history, the report added.
Among the key findings:
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o As many as one in eight (13%) subprime home loans ended in foreclosure within five years of organization.
o For many borrowers, strong house price growth increased the amount of equity in their homes and enabled them to refinance their mortgages despite being behind on their monthly payments. When these distressed prepayments are added to the foreclosure rates, the total "failure rate" for subprime loans approaches 25%.
o With the housing boom cooling, fewer delinquent borrowers will have the equity needed to refinance their loan or sell their home to avoid foreclosure. Foreclosures are more likely in markets with lower house price growth.
o Subprime loans originated in 2002 have a one-in-10 lifetime chance of foreclosing. For loans originated in 2005 and 2006 that figure increases to one-in-five,
o Many borrowers in the subprime market refinance from one subprime loan to another, losing equity each time. Borrowers that repeatedly refinance face a 36% chance of losing their home to foreclosure (an estimate that relies on assumptions drawn from refinance patterns in the subprime market).
The study projects foreclosures on subprime home loans made nationwide during each year from 1998 through 2006, and measures the effects of housing appreciation on loan performance. It estimates future foreclosure rates using housing appreciation forecasts developed by Moody's Economy.com, and predicts subprime foreclosure rates in all major metropolitan areas in the United States. The study also examines factors associated with subprime foreclosures, including high-risk features typically included in subprime home loans.
The report is available online at www.responsiblelending.org.
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