Report: 2.2 Million Subprime Borrowers Face Foreclosure

[PerryChase]

The Center for
Responsible Lending has released a new

report: Losing Ground: Foreclosures in the Subprime Market and Their Cost to
Homeowners.

"… foreclosure rates will increase significantly in many markets as
housing appreciation slows or reverses. As a result, we project that 2.2
million borrowers will lose their homes …
…
We project that one out of five (19 percent) subprime mortgages originated
during the past two years will end in foreclosure. This rate is nearly
double the projected rate of subprime loans made in 2002, and it exceeds the
worst foreclosure experience in the modern mortgage market, which occurred
during the “Oil Patch” disaster of the 1980s."

———————

I took the liberty of reposting this from
Calculated Risk.  I remember that a while back, people were ganging-up on powayseller for saying that millions WILL loose their homes.  More specifically, some posters felt it was irresponsible for powayseller to suggest something like that. 

It looks like the Center for Responsible Lending is making that same call. Only time will tell if those making that prediction will be right. I’m
defending powayseller because I think that her posts are thought provoking. I don’t agree with all her posts but I like the way she considers the downside
possibilities. So what if she predicts gloom and doom? If we want to be intelligent rational thinkers, we need to check out emotions at the door.

Personally, I don’t think that a downturn in real will kill the general economy.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

Another Christmas story,

GOOD DAY FOR: Renting, as about one in five homeowners — 1.1 million people — who took out subprime mortgages in the last two years will end up in foreclosure and lose their houses, according to the Center for Responsible Lending. (The New York Times, free registration required)

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

One would think this would be a cause to a call for tighter Credit , But I think somehow the economy is being viewed as part of the war on Terror so is being viewed as cannot go into recession at all costs (just my opinion).

We will see I guess.

[powayseller]

Wow! Good find, Perry. I also happened to see this in the front page of today’s U-T, and am glad you posted this first. Now every U-T reader who opens to the Business section will see “1 in 5 Subprime Loans in Trouble”.

Too bad the title was not more accurately “1 in 3 Subprime Borrowers in Trouble”. If I had written the story, I would have titled it “1 in 3 Subprime Borrowers in Trouble”.

Who cares what happens to a specific loan? We care about the fate of the borrower, the fate of the house.

Let me explain, per page 19 of the report.

The 20% foreclosure rate is for one specific subprime loan, not for one specific homeowner. Because 60% of subprime borrowers homeowners refinance their way out of the problem into another subprime loan, “1/3 of all families who obtained a subprime loan in 2005/2006 will ultimately lose their homes”(p. 19)

Borrowers who repeatedly refinance into a subprime loan increase their possibility of foreclosure, so that by the 4th loan, their foreclosure possibility is 36%.

The report found that subprime borrowers in trouble used to refinance their way out of the problem. Large numbers of subprime borrowers have been leaving their mortgages under duress in recent years. Even though they were behind on their mortgage, rising home price appreciation allowed them to refinance. Now that home prices have stopped rising, they cannot refinance while delinquent.

Half of all subprime borrowers are delinquent at least once during the first 5 years. That is an amazing number. In the past, these borrowers could work their way out of the problem by either refinancing or selling. Their inability to do either is what’s causing the concern.

The most startling figure then is that half of all subprime borrowers are delinquent at least once. What will be their prognosis in an era of declining home values, rising interest rates, and rising unemployment? A strong housing market covered up the distressed mortgages, but did not prevent them from occuring.

The study only considered loans with first liens made for owner occupied property. How many more borrowers who got flipper and investment and vacation homes and rentals, are we going to add to this list?

“The housing market downturn is in full swing”, chief economist from Moody’s.com (p. 20)

The report concludes with some options. I found it interesting that the lenders are not willing so far to help the borrower in trouble. “As one Wall Street professional put it, ‘The general feeling among investors is that they are not willing to trade…income for increased servicing costs’.” (p 33) So investors do not want to spend the extra time or money it takes to work with a borrower in trouble.

I wish I could ask them “would you rather restructure the loan for this guy or lose $50K or $200K of your investment by having to sell it at auction?”

So I don’t understand why the investor would rather foreclose than restructure.

[ibjames]

I think that maybe since it is across the country that they wouldn’t help them. Not all places that used these loans have houses that cost as much as here, so the decrease in price and losses won’t be as bad. Maybe factoring it all in with markets with price increases like ours, the losses aren’t great enough to demand an effort to make things right.

[no_such_reality]

I wish I could ask them “would you rather restructure the loan for this guy or lose $50K or $200K of your investment by having to sell it at auction?”

I think they know the trough they’ve been dining at pretty well. I saw the SecureAdvantage loan ad from Quicken in the paper this morning. With an 80% LTV, the rate is 6.5% with a minimum payment of 3.5%/year. So a 300K loan is min payment $875. Regular $1896. I wonder how much the rate and minimum payment goes up as you exceed 80% LTV.

Unfortunately, I suspect they know that the buyers can only really afford the minimum, any restructering merely delays the inevitable and potentially increases their loss.

[Anonymous]

I discovered some things of interest in this current market that set it apart from the Oil Patch/S&L depression of the mid-80s.

First, many of the subprime loans are bundleed and sold off as investor packages to be monetized by Wall Street.

Second, to that end insurance is purchased to counterbalance any projected losses in the portfolio. Many of the insurance companies are rated ‘B’ grade or less

Third, the Wall Street houses turn the NPA (non-performing asset) over to captive debt collection companies whose job it is to collect on a bad debt. Curiously, this has the effect of placing the defaulting owner in a position of dealing with hardened debt collectors only interested in collections and profits, not in a workout or possible recast of the loan. Indeed, the original lender is nowhere in the picture.

This will place the upcoming default debacle either on the shoulders of the insurance companies (who are not well funded) or the Wall Street stockholders. There won’t be any bailout by the Fed since the loans were never put into the secondary insurance market, and hence are not insurance by Freddie or Fannie.

rona

[sdrealtor]

Two thoughts:

There is an obvious reason for sub prime lending. The borrowers have bad credit and most (not all) take there debt obligations less seriously than those with good credit. When they default they will damage their already poor credit even further. I suspect most (not all) will walk away without batting an eye. I would not plan on sub prime defaults changing the market as a whole.

The homes the sub prime buyers purchased tend to be in less desireable areas. Knowing what I know about the make up of the Piggington’s, I wouldnt count on buying one of their homes.

[PerryChase]

I agree that most FBs will walk away without batting an eyelash. That’s the reason why I don’t believe that consumption and the general economy will really hurt. We’ll have a recession but after that, things will move along.

I can’t picture people who are used to purchasing all kinds of junk tighten their belts, stay home, drive old cars and make other sacrifices to afford the mortgage payment. No, they will give their houses to the bank and keep on consuming as usual. Housing will stagnate but consumption will not.

[Daniel]

Perry, I think we disagree on this one. I actually believe that people will try to avoid foreclosure at all costs. The only exception I see would be vacant flipper houses. Those will be quickly abandoned. But I think that a regular homeowner in a bad loan will attempt to stave off foreclosure as much as they can (cutting down on consumption, renting rooms, etc). Whether they can pull it off or not is another story, but I think that they’ll try very hard. Homeownership has such a strong emotional and social component, people won’t let go without a fight.

[North County Jim]

I remember that a while back, people were ganging-up on powayseller for saying that millions WILL loose [sic] their homes.

Uh, no. If I recall, people were ganging up on PS because she predicted MOST Option ARM borrowers would lose their homes. That’s quite a difference, no?

I’m too lazy to search for the thread(s) in question. If someone (PC and PS come to mind) would like to resurrect the appropriate thread(s) where people were ganging up on PS, there are probably a few of us who would be casually interested in PS’s previous prognostications.

If my memory is in error, I’ll even throw in a mea culpa.

[bgates]

I recall people were ganging up on PS because she stated as incontrovertible fact that x would happen, and anyone estimated the probability of x as less than 100% was either afraid to face the truth or not smart enough to follow ps’ arguments. She’s “open-minded” enough to entertain the most bizarre conspiracy theories, but won’t stand for the possibility of alternate scenarios for something that hasn’t even happened yet.

[(former)FormerSanDiegan]

It was something like 90% of all ARMS taken out in the last two years would default.

[PerryChase]

There are the three old threads in question. It looks like people we upset at powayseller’s for equating “at risk of default” with “expected to default.” In essence, posters were upset at PS for making it sound like millions of FBs “will” default rather than “may” default.

This new report clearly predits that “2.2 million borrowers will lose their homes.”

I haven’t had the time to re-read the threads and compare the predictions.

http://www.piggington.com/node/1689

http://www.piggington.com/cagan_said_1_million_people_will_default

 

http://www.piggington.com/cagan_13_of_recent_arm_buyers_likely_to_default

[PerryChase]

Here’s the NY Times article mentioned by Nor_LA-Temcu-SD-Guy on the Center for Responsible Lending report.

http://www.nytimes.com/2006/12/20/business/20home.html?ref=business

Talking about semantics, the CRL report says “we project that one out of five (19 percent) subprime mortgages originated during the past two years WILL end in foreclosure.” But the NY Times translates it as: “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.”

Then NY Times then goes to go say: “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.”

[Author]

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