Foreclosures, particularly on subprime home loans, continue to rise. The Center for Responsible Lending projects that subprime mortgages made in recent years will ultimately result in the loss of a home for 2.2 million families. Yet, although the sharp upward trend in foreclosures is undeniable, some in the lending industry are criticizing information provided by one data-aggregating firm, RealtyTrac, to suggest that foreclosure concerns have been overblown. Unfortunately, nothing could be further from the truth. Recent reports from business analysts, investment banks and even mortgage lenders all confirm that Americans with subprime mortgages are losing their homes at an alarming rate. Consider just a sampling of recent reports on mortgage performance:
Lehman Brothers: Lehman Brothers Equity Research projects "30% losses over time on the 2006 [subprime] vintage."[1]
Fitch Ratings: Fitch Ratings recently reported that subprime mortgages originated in the first half of 2006 had experienced default rates at one year that were more than 4 times higher than those experienced by subprime loans originated in 2005 at the same age.[2]
Mortgage Bankers Association: According to the Mortgage Bankers Association's most recent delinquency report,[3] loans entered foreclosure at rates that set a new record high. This trend has been driven by subprime foreclosures. During the last quarter of 2006, the MBA data show new foreclosures on subprime loans were up 50% from the same period a year earlier. Among riskier subprime loans with adjustable interest rates, foreclosure starts shot up by 70% from the same period a year earlier.
In its latest release, the MBA said that recent delinquency and foreclosure statistics have been "driven" by seven states—Arizona, California, Florida, Indiana, Michigan, Nevada, and Ohio. Notably, according to 2006 estimates from the U.S. Census Bureau, one of every three (30.4%) Americans lives in these states. The MBA claims that these states have "special circumstances," yet recent data from the Office of Federal Housing Enterprise Oversight (OFHEO) show that housing prices in 27 other states have had one-year appreciation rates at or below that exhibited in the seven "special" states.
Moody's: Moody's Investors Service, a major investment banker, has stated that 2006 subprime mortgages are performing poorly compared to subprime loans made in prior years and "the level of seriously delinquent subprime loans included in securitizations issued in 2006 is significantly worse than those included in securitizations issued [in previous years]."[4]
The increase in home losses is the direct result of subprime mortgages that have been packed with features known to dramatically increase the chance of foreclosure—loans approved with little or no income verification, loans with prepayment penalties, and loans with large payment increases that clearly go beyond the means of low- and moderate-income families. We at the Center for Responsible Lending continue to call on regulators to take swift and decisive action to rein in these types of reckless lending practices on subprime loans. This action is necessary to encourage sustainable homeownership that will benefit families, communities, and ultimately the entire nation.
[1] Mortgage Finance Industry Overview, December 22, 2006, page 1.
[2] Celia He and Glenn Costello, Examining Home Price Inflation and Residential Mortgage Default Rates, Fitch Ratings U.S. Residential Mortgage Special Report (May 24, 2007).
[3] Mortgage Bankers Association, National Delinquency Survey, First Quarter 2007 Edition.
[4] Debash Chatterjee, U.S. Subprime Mortgage Market Update: April 2007, Moody's Investor Service, Structured Finance Special Report.
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.