High-interest loans lead to foreclosures

In the growing body of research showing that high-interest "sub-prime" home loans are bad for consumers and the economy, the Center for Responsible Lending has released a damning study that finds one out of five subprime loans end up as foreclosures:

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.

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.

The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody's Economy.com. Researchers examined more than six million mortgages made from 1998 until the third quarter of 2006; the report is the first nationwide study on the performance of subprime mortgages. It includes projected foreclosure data for all major metropolitan statistical areas. The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C.

The Mortgage Banker's Association claims that the Center is using overly pessimistic data. But as blogger bondad notes, this isn't the first piece of evidence that subprime loans "underperform." As the AP reported last month:

In a conference call titled "How Bad is Subprime Collateral?" Tom Zimmerman, head of ABS research for UBS, and David Liu, head of mortgage credit, discussed how much higher loan delinquencies and foreclosures are for 2006 subprime loans compared with similar subprime loans from earlier years -- the result of deteriorating underwriting quality from lenders combined with a slower housing market.

Still, despite the adverse conditions, "I guess we are a bit surprised at how fast this has unraveled," said Zimmerman. While it's "not a secret that subprime collateral has performed pretty disastrously so far," he said, "I must say we were a bit surprised by the magnitude with which" the loans "deteriorated this year."

The rate of subprime loan delinquencies of 60 days or more -- meaning borrowers are that far behind in their payments -- has climbed to about 8 percent, up from about 4.5 percent a year ago.

The rise of predatory lending -- especially by "mainstream" finance operations like Citigroup -- was once a fringe issue. Thanks to groups like the Center, it's now at the center of the policy debate. Indeed, as Rep. Brad Miller (D-NC) comments at the website DKos:

One of the first items of business for the Financial Services Committee in the new Congress will be a strong predatory mortgage lending law, modeled after various state laws, including North Carolina, that have provided homeowners effective protection and not diminishned the availability of credit in the subprime market.