Study expects 1.1 million foreclosures Those with adjustable mortgages are most likely losers, even with conventional loans
Author: Skia
Category: Real Estate
Recent home buyers, many seduced by too-low-to-last teaser loan rates, are finding that all good things must end. For more than a million, they could end in foreclosure, according to a study released Monday.
Americans borrowed $2.2 trillion from 2004 through 2006 in the form of adjustable loans, which start with low monthly payments that reset to higher rates. As those loans reset, 1.11 million people will lose their homes, according the study by First American CoreLogic, a firm that tracks mortgage risk for the financial services industry.
The figure is significantly less than a widely published number from the Center for Responsible Lending.
As prices appreciated rapidly, buyers turned to adjustable-rate loans that made it easier to afford high-priced homes, at least initially. But a slowdown in the housing market means that buyers who took out the loans as the boom was coming to an end made little or no money off their investments. It’s those borrowers who are most likely to wind up in default because they won’t be able refinance or sell their homes at a profit to cope with higher monthly payments, the report found.
Unlike a lot of other research about mortgage risk that has roiled Wall Street during the past couple of weeks, the First American report didn’t find the problems with risky loans to be limited to subprime borrowers, or people with poor or little credit.
The largest group of loans likely to go into default are those that started with extremely low teaser rates regardless of whether borrowers had high or low credit scores, the report finds.
“This isn’t just subprime,” said Christopher Thornberg, an economist with the consulting firm Beacon Economics in Los Angeles. “This problem is starting to occur in most of the adjustable- rate mortgages. Even for prime borrowers, we’re seeing a big spike in delinquencies among adjustable-rate mortgages.”
The findings paint a different picture than a study done by the Center for Responsible Lending in December, which estimates 2.2 million subprime borrowers alone would lose their homes during the next several years. The center, a nonprofit advocacy group, bases its estimate on the assumption that the housing market will decline during the next several years while First American assumes that prices will remain flat.
The study does not break out statistics by region, but the Bay Area will be hurt less than other parts of California and the country as a whole, said Christopher Cagan, director of research and analytics for First American CoreLogic and the study’s author.
Borrowers in the Central Valley, where the market is saturated with new homes, are more likely to lose their homes than those in the Bay Area, according to a separate analysis for the California Association of Realtors that Cagan did last year.
Nationwide, First American expects that $112 billion will be lost during the next seven years to investors and lenders as a result of defaults on the adjustable loans issued from 2004 through 2006.
While that sounds like a lot of money, it’s not enough to hurt the industry or to affect the nation’s economy as a whole, Cagan said, because $112 billion translates to less than 1 percent of the total mortgage lending projected during the next seven years.
“Nationally this reset will not break the economy or the lending industry,” Cagan said. “In any business cycle — whether you’re talking about stocks, bonds, gold, oil or anything else — the investors that got in at the end of a long bull market and are the most leveraged are the ones that are exposed. That’s what we’re seeing now.”
But Thornberg, the Beacon consultant, said that the First American analysis fails to take into account the relationship between the housing market and the economy as a whole. Defaults are rising at a time when the job market is stable, a highly unusual occurrence.
“This would be normal in the context of a labor market that was weak, but the labor market is quite strong,” Thornberg said. “These problems indicate that this is just the tip of the iceberg.”
Thornberg says he expects that the economy will weaken in 2007, leading to more foreclosures.
“You can’t look at this in a vacuum,” he said.
More foreclosuresFrom 2004 through 2006 more than $2.2 trillion in adjustable loans were issued to people buying and refinancing homes.
More than 1 million homeowners may default on those loans during the next seven years.
Those foreclosures could translate into a loss of $112 billion.
Source: First American CoreLogic
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