Report Foresees 2.2 Million Families Foreclosed
Dec. 19, 2006 (EIRNS)In a report that still understates the damage to be wrought by the popping of the Greenspan housing bubble, the Center for Responsible Lending (CRL) forecasts:
"As this year ends, 2.2 million households in the subprime market either have lost their homes to foreclosure, or hold subprime mortgages that will fail over the next several years." The study also shows that the worst failure rates (21-24%) will occur in the states which experienced the highest rates of apreciation, such as California, New York, Maryland, and Virginia.
A humanitarian disaster, "worse than Katrina" in the words of one speaker on a Wednesday telephone conference call about the new report, is about to hit.
Subprime loans, primarily made to black and Hispanic buyers, made up nearly one quarter (in dollar value) of all mortgages originated this year. The majority of these loans are not for an initial home purchase, but for a refinancing of a mortgage already gone bad. Prior to the recent housing market crash, many subprime borrowers were able to hang on by refinancing on the basis of appreciating equity paying their loans "in distress." With the general collapse in real estate values, many of these will now go into default.
But even without the collapse in values, the subprime market was designed with a built-in time bomb. In testimony to the Senate Banking Committee in September, Michael Calhoun, the President of the CRL, showed an example of the most typical subprime loan, known as a 2/28, with an "exploding ARM" (adjustable rate mortgage). Buyers can qualify for this type of loan if the original ("teaser") monthly payment is not higher than 61% of their after-tax income. At the end of two years, even without a rise in interest rates, the payment will typically rise to 96% of the purchasers monthly income! No wonder then, that the study conservatively forecasts that one-third of families who received a subprime loan in 2005 and 2006 will ultimately lose their homes!
The collapse of this market is already creating anger in the black and Hispanic community which was sucker-punched into the scam. A reporter from a Hispanic news serice asked on the teleconference: "Will you now go back to those minority organizations who were told 'Hey, it's great to buy homes,' and take responsibility for what's happened?"
Subprime borrowers are not protected by the same laws which protect prime borrowers. Their position in litigation becomes complicated and weakened because they are often not facing the seller or even the first mortgage holder. Mortgages are packaged and resold multiple times; the subprime mortgage broker has no responsibility for the ultimate repayment of the loan. The Center for Responsible Lending (CRL) and the Leadership Council on Civil Rights are promoting legislation, sponsored by Reps. Barney Frank and Chris Dodd, titled the Federal Anti-Predatory Lending Statute, which aims to prevent some of the worst abuses occurring at the time of sale, and to give more legal power to people in foreclosure.
The threat of 2.2 million families (probably 10 million people) facing foreclosure already puts the looming crisis on a par with the Great Depression. Obviously emergency national action against sheriff's sales and eviction, as proposed by LaRouche, will be required of the next Congress. But millions of higher-income families who qualified for standard mortgage financing will soon also be facing catastrophe, as the collapse of housing values puts them into what the President of the National Association of Realtors called an "upside down" (negative equity) position.