Study Forecasts Rising Subprime Foreclosures

“This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the “Oil Patch” disaster of the 1980s.

The study, which cites RealtyTrac numbers as one of its sources, looked at subprime foreclosure rates from 1998 through 2006 and closely ties those rates to house price appreciation. The projection of an accelerating subprime foreclosure rate is based on the expectation that house price appreciation will continue to slow.

The study argues that subprime foreclosures will heavily impact the overall housing market because subprime loans now make up a quarter of all home loans. It warns cities in California, Nevada, New Jersey, New York and Michigan, as well as the greater Washington, D.C. area, to expect a high rate of subprime foreclosures.

The center offers up proposed solutions to curb increasing foreclosures, including due diligence by lenders before a loan is approved to make sure the borrower is qualified to repay, regulation of predatory lending practices, and coordinated programs to help delinquent homeowners. The center also endorses “strong laws against foreclosure ‘rescue’ scams, banning predators from targeting struggling homeowners.”

Absent from the study's executive summary and proposed solutions are any mention of the borrower’s role in preventing foreclosed subprime loans. While this is somewhat understandable given that the study is published by a group focused on responsible lending, it is still a regrettable omission.

That’s because the borrower is the only party who is purely motivated to avoid foreclosure. Everyone else — from lenders to lawmakers to nonprofit counseling services — is motivated by other agendas, be it revenue, reelection or relevance. Foreclosure prevention may often fit with those agendas, but it’s rarely the driving force.