Surge in Home Foreclosures Coming

A surge in home foreclosures coming over the next year will cause U.S. property values to sink by $164 to $223 billion, with the most severe impact in minority communities, a new report says.

A new Center for Responsible Lending (CRL) study reveals that over two million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.

The “Losing Ground” study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006. CRL finds that despite low interest rates and a favorable economic environment during the past several years, the subprime market has experienced high foreclosure rates, and they project that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

The CRL report examines factors that drive subprime foreclosures. These include adjustable rate mortgages with steep built-in rate and payment increases, prepayment penalties, limited or no income documentation, and no escrow for taxes and insurance. CRL also determined that these factors cause a higher risk of default regardless of the borrower’s credit score.

In addition, the CRL study finds that recent high appreciation in many areas has masked problems in the subprime market, and that the cooling housing market will cause failure rates to rise sharply in many major markets. California, Arizona, Nevada, and greater Washington DC will be especially hard hit.

Many of the families who will lose their homes live in neighborhoods with lots of minority residents, who received a disproportionate share of such mortgages. The report asserts that foreclosures have a negative effect on surrounding properties, raising the risk of fire and vandalism.

“These foreclosures are wiping out wealth that people often took a lifetime to build,” said Martin Eakes, the center’s chief executive. “Many families will never achieve home ownership again”.

Of course, one man’s disaster can be another man’s fortune. Those who have the money and the courage to step in and purchase foreclosed properties at bargain prices stand to do well over the long term. But financial danger can lurk even with deeply discounted properties. Many speculators will probably step in too early and purchase properties while the housing market is still on the way down.

In spite of what many in the industry will tell you housing cycles tend to be very long term in nature. Unless you are well financed, or want to live in a “bargain” property yourself making timing less critical, if you are speculating you will find it safer to wait until the market is once again on the way up rather than to try and pick the bottom.

Folks who hope to flip houses at a profit may find that it will not be as easy to quickly accomplish at a decent profit as some so called “experts” would have you believe.

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