A CRL study released in December 2006, revealed that millions of American households would lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.
The "Losing Ground" study was the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006. CRL found that despite low interest rates and a favorable economic environment during the past several years, the subprime market was experiencing high foreclosure rates, and we projected that one out of five (19.4%) subprime loans issued during 2005-2006 would fail.
The report discussed a number of factors that drove subprime foreclosures—these included adjustable rate mortgages with steep built-in rate and payment increases, prepayment penalties, limited income documentation, and no escrow for taxes and insurance. We also determined that these features caused a higher risk of default regardless of the borrower's credit score.
Our study also found that high appreciation in many areas masked problems in the subprime market, and that the cooling housing market caused failure rates to rise sharply in many major markets. The report predicted that California, Arizona, Nevada, and greater Washington DC would be especially hard hit. Also in this report, we projected lifetime foreclosure rates for 2006-originated subprime loans in each MSA in the United States.