Subprime losses lead to drop in home ownership

Despite the mortgage industry's claims to the contrary, an advocacy group says that subprime foreclosures will leave 1 million fewer homeowners.

By Les Christie, staff writer

NEW YORK ( -- About 2.4 million holders of subprime mortgage loans made between 1998 and 2006 will lose their properties to foreclosure, according to a report from the Center for Responsible Lending, a non-profit policy and advocacy organization for home owners.

Worse, that will result in a net home ownership loss of one million households.

CRL's analysis rebutted the mortgage industry's claims that the increase in subprime loans has opened up home ownership for millions of low income buyers. Instead, CRL contends, relatively little subprime lending is used for first-time home buying.

Testifying before the House Finance Committee today, CRL's president, Michael Calhoun, said the primary reason for the jump in foreclosures is "the abandonment of underwriting standards."

The report criticized both lax underwriting - noting in particular a disregard for the ability of borrower's ability to repay loans - as well as dangerous loan vehicles, such as "exploding ARMs," which have low rates for the first two or three years before resetting at much higher rates.

CRL contends that few subprime loans went to first time buyers, a notion that was seconded by Emory Rushton, chief national bank examiner for the Office of Comptroller of the Currency, in his testimony before the Finance Committee. He pointed out that Mortgage Bank Association figures revealed only 11 percent of subprime loans went to first-time buyers last year.

CRL says the record going back to 1998 is even worse; only 9 percent of subprime loans went to first-time buyers in the nine years through 2006.

The bulk of these loans actually went to refinance existing mortgages, incurring additional fees. And many of these refinancings involved cash back deals which increased the size of the original mortgages. When all was said and done, borrowers owed more on their homes after refinancing.

Because of the lower teaser rates, however, the new loans were affordable - at first. But when they reset at the higher, fully indexed rates, many borrowers could no longer make their payments.

Often that forced home owners to refinance yet again, extracting even more equity from their house. Since home prices kept rising, there was home value to draw on.

But now that prices are stagnant, even falling in some areas, many owners find themselves tapped out or even underwater, owing more on the mortgage than the house is worth and unable to make their monthly mortgage payment.

Borrowers in this kind of a bind are likely to find themselves in foreclosure, and that's what's going to lead to the decline in home ownership that CRL is predicting.