A Dim Forecast for Risky Mortgages

From the Washington Post

About 2.2 million homeowners with high-interest mortgages have lost their homes to foreclosure or could do so within the next several years, according to a report from a nonprofit group that opposes predatory lending.

The Washington region is likely to be especially hard hit, according to the report released yesterday by the Center for Responsible Lending in Durham, N.C. That's because as prices here soared in recent years, many people took out high-cost loans, also called subprime loans.

Neighborhoods with many black and Hispanic homeowners and new developments with many first-time buyers will be most affected, said Keith Ernst, senior policy counsel at the center. Those groups were most likely to pay high interest rates because of weak credit and minimal down payments.

The top officer of the trade group for real estate agents joined center officials at a news conference yesterday to discuss the study. "We fully share the concerns of the Center for Responsible Lending," said Pat Vredevoogd Combs, president of the National Association of Realtors. "Far too many families are at risk of losing their homes to foreclosure."

In early December, a bipartisan Senate group wrote to federal banking regulators asking them to warn lenders that they should make subprime loans only if they are sure the borrowers can repay. The four Democrats and two Republicans asked banking regulators to "move quickly" to add these subprime loans to a warning they issued to lenders recently on other kinds of popular nontraditional mortgages.

Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency, said the agency is reviewing the letter.

High-rate lending has grown rapidly in recent years and has been credited with helping boost homeownership to near-record levels. In 1999, about 5 percent of mortgage loans were high-interest, but now about 20 percent of mortgages originated are subprime.

To avoid down payments, some borrowers have taken out "piggyback" mortgages, which are second mortgages at higher rates, while others get subprime loans for the entire mortgage amount. Some of these loans have low teaser rates for two years before rising significantly. Many borrowers can afford the initial payments but could find it impossible to keep up when the payments increase. Many such loans also contain prepayment penalties that can require borrowers to pay tens of thousands of dollars if they refinance.

The Center for Responsible Lending analyzed about 6 million subprime mortgages made from 1998 to 2004 to determine which have gone bad and to project how many more could be expected to enter foreclosure. Based on those numbers, it also projected what could happen to loans made in 2005 and 2006. The study said that if the real estate resale market remains weak, the proportion of subprime borrowers in foreclosure in the District could rise to 22.8 percent from 6.8 percent, and the foreclosure rates for these kinds of loans could more than double in Maryland and Virginia for loans made in 2006.

Those projected foreclosure rates are much higher than those for prime mortgages. There are about 50 million outstanding mortgages of all types nationally.

The study follows a quarterly report released last week by the Mortgage Bankers Association, which found that about 948,000 households with high-cost loans were behind on their payments or were at some point in the foreclosure process. But officials at the lending trade group said the center's report was overly negative because many people will be able to refinance or sell their homes before they fall hopelessly behind.

The report is "wildly pessimistic" because most homeowners have prime loans and are not at financial risk, said Mike Fratantoni, a senior economist at the MBA. He said the subprime market is a small part of the overall market. Lending industry officials have said that regulatory action could injure the subprime market.

"Ninety out of 100 borrowers make their payments on time every month," Fratantoni said. "We don't want to jeopardize the availability of mortgage credit because not everybody is a success."