Subprime foreclosures to spike
Many vulnerable Americans will lose their homes during the next few years.
NEW YORK (CNNMoney.com) -- The number of homeowners with subprime mortgages who will lose their homes to foreclosure will jump over the next few years, according to a recent study.
A release from the Center for Responsible Lending (CRL), a nonprofit, nonpartisan research and policy organization advocating for homeownership and family wealth, revealed three key findings:
Delinquencies are much more common for subprime loans. The recipients, of course, are less credit worthy to begin with. And lenders charge these borrowers at higher rates, which increases the likelihood that they'll have trouble making payments.
Another factor, the Center for Responsible Lending argues, is that lenders often load up subprime loans with high-risk provisions, setting up borrowers to fail.
Some of these include: adjustable interest rates, balloon payments, prepayment penalties, and limited documentation requirements.
The dominant type of subprime loan today is an adjustable-rate mortgage called a "2/28." It features rate adjustments every six months after a two year fixed-rate period. The initial rate is often a steeply discounted or "teaser" rate; when the loan resets the rate may be much higher. The payment shock leads some to characterize these loans as "exploding ARMs."
And many lenders and mortgage brokers are guilty of very loose underwriting procedures, the Center for Responsible Lending says. They extend loans to borrowers who can't afford them. The lenders insulate themselves from the consequences of this bad underwriting by packaging these deals and selling them to other investors.
Ellen Schloemer, research director for the Center for Responsible Lending, says, "People who make the loans don't hold the loans long term. That makes them less interested in the outcome."
Schloemer also says that everyone in the industry makes more money by getting buyers into more expensive housing; putting many borrowers on the thin edge of affordability. If an emergency arises - a leaky roof, a health crisis or a job loss - there's no money left to ride it out.
"Many borrowers are very leveraged financially," says Schloemer, "and get pushed over the edge."
Old story, new chapter
The report pointed out that the conditions leading to high subprime foreclosure rates are nothing new. What has changed is the housing market. Steady home price increases enabled many subprime borrowers to build up equity. Struggling owners could tap that equity to tide them over. Or they could sell the house at a profit. They wouldn't suffer the total loss that foreclosure entails.
With sluggish or falling markets, home equity vanishes and that escape hatch closes.
As housing markets slowed this year, delinquency rates have crept upward. According to Doug Duncan, chief economist of the Mortgage Bankers Association (MBA), these delinquencies have hit the subprime market particularly hard.
The foreclosure inventory rate for prime loans inched up by 0.03 percentage points, from 0.41 percent to 0.44 percent. The subprime foreclosure inventory rate, however, jumped 0.30 percentage points, from 3.56 percent to 3.86 percent.
Still, as Duncan popints out, delinquency and foreclosure rates have been quite low the last two years. For those facing possible foreclosure, that may be small consolation, but even those in deep trouble can take steps to ease the pain.
What to do
Too often, those facing foreclosure do nothing. That just aggravates the problem. Instead:
Act now The threat of foreclosure does not go away if you ignore it; it just gets worse. "The earlier you act, the better," says Ken Wade, CEO of NeighborWorks America, a community development organization. "When you fall too far behind, it makes it very difficult to salvage the situation."
Get independent counseling Many agencies offer free advice to homeowners who need it. The Department of Housing and Urban Development (HUD) has a list of certified counselors on its Web site and NeighborWorks has a toll free number (1-888-995-HOPE) that refers people to counselors in their area.
An advisor can examine a homeowner's income and expenses for ways to work out a viable budget and possibly keep the house.
Talk to your lender The image of lenders as rapacious villains rubbing their hands together at the prospect of seizing family farms and tossing elderly widows out in the cold is out of date.
"Lenders found out years ago that foreclosing is not profitable for them," says Wade. "It's better for them if things can be worked out."
That could mean suspending payments for a period or reworking the length of the loan. Lenders have two departments that handle delinquencies - the collection and the mitigation departments.
Collection has one goal; get payments, but mitigation's main role is to assess and work out the situation, if possible. When you call for help, ask for the mitigation department.
Talk to a lawyer Says real estate attorney Neil Garfinkel of AGMB Law in New York, "I would counsel the party not to sign anything or agree to anything without discussing it a professional."
But the emotional aspect of financial facing foreclosure can cause some borrowers to act against their own best interests, according to Wade.
"People are embarrassed, ashamed when they can't pay their bills and many feel that there's nothing lenders can do," he says.
The key for borrowers is to be proactive; pursue the best result they can achieve and that means understanding all the options. Many don't.
"Between 40 percent and 50 percent of the people actually foreclosed on have had no contact with either their lender or a counseling agency," says Wade.
Some may have been able to salvage the situation had they acted when they first got into trouble.