Nearly one of every five borrowers who took out a subprime mortgage in 2005 and 2006 will end up losing their homes in a foreclosure, the Center for Responsible Lending said Tuesday.
That works out to 2.2 million households losing $165 billion in wealth, with Latino and African-American communities taking the hardest hits.
“An extraordinarily large number of families will lose their homes,” said Michael Calhoun, president of the nonprofit group based in North Carolina. “This is not a necessary disaster; this is a preventable disaster.”
In Colorado, the report estimates that 19.6 percent of borrowers who took out subprime loans in 2005 and 2006 will lose their homes, compared with a 13.2 percent loss rate for subprime loans made between 1998 to 2001.
Subprime loans, which carry a higher interest rate, are designed for borrowers with impaired credit ratings.
Once a niche market, they now account for nearly one of every four mortgages made in the U.S.
“We all know that some subprime loans are a recipe for disaster if the family can’t afford them when the payment goes up,” said Pat Vredevoogd Combs, president of the National Association of Realtors.
Realtors are concerned that many families don’t understand the risks behind their mortgages and that a spike in foreclosures could depress housing markets, Combs said.
The CRL looked at 6 million subprime mortgages issued between 1998 and 2004. It also looked at projections for future home-price gains.
Even when home prices nationally were enjoying robust gains, about 13 percent of subprime borrowers lost their homes in foreclosure within five years.
Subprime loans that start out with low teaser payments that adjust rapidly higher after two years, known as 2/28 loans, are especially dangerous.
Critics call these loans “exploding ARMs” because payments can rise 30 percent or more from the payment amount that was used to qualify a borrower.
Now that home-price gains are stalling and going negative in some markets, subprime borrowers will find it harder to refinance or sell, Calhoun said.
Many subprime loans also carry prepayment penalties that trap borrowers who try to refinance.
Although easier access to credit and rising homeownership rates among minorities are good things, the gains of recent years may prove illusory, said Wade Henderson, president of the Leadership Conference on Civil Rights.
The CRL estimates that more than half of all mortgages taken by African-Americans are subprime, while 40 percent of mortgages to Latino borrowers are subprime.
“Communities of color will bear the greater share of the burden,” Henderson said.
A push by mortgage lenders to promote home refinancing as a budgeting tool and easy source of spending money has compounded the problem.
Despite rising interest rates, homeowners extracted more than $500 billion worth of home equity in the first half of the year, more than they did in all of 2005.
When homeowners refinance a subprime loan into another subprime loan, the odds they will lose a home to foreclosure rises to 36 percent, the CRL study estimates. Lenders have unnecessarily loaded subprime loans with trapdoors in the name of promoting homeownership, Calhoun said.
The defaults and losses could be far worse than even the darkest scenarios the industry has imagined.
“This is a false choice,” Calhoun said. “We don’t have to have these kinds of foreclosure rates for people to have the opportunity for homeownership.”
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
