SubPrime Loans and Foreclosures: Looks Like There is a Connection!

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I guess you learn something new every day. While we rely on companies like RealtyTrac to give us forclosure data, apparently there is not an agreed upon definition of what foreclosure is:

Generally, lenders consider homeowners in foreclosure when they are 120 days late making payments, said Louis Spagnuolo, a senior mortgage banker for Home 123 in Boca Raton.

“Unfortunately, there is no uniform standard for when somebody is in foreclosure,” Spagnuolo said. “The industry needs to come up with some kind of a standard so everyone can know what these numbers mean because right now they’re misleading.” (Sun Sentinel)

The subprime lenders are really getting beaten up in the press today.

The San Francisco Chronicle reports:

“Subprime lenders are selling the most dangerous loans to the most vulnerable borrowers,” said Michael Calhoun, president of Center for Responsible Lending, a nonprofit research and policy group. “One in 5 families who get subprime loans today will lose their homes to foreclosure.”

I have to show both sides of this one, though. In the same piece, the Mortgage Bankers Association gives their own rhetoric to protect these risky loans:

But the Mortgage Bankers Association, a trade group that represents the lending industry, says the Center for Responsible Lending’s numbers offer a worst-case scenario. The association estimates that subprime loans account for 14 percent of the total number of mortgages outstanding.

“They’re picking the most pessimistic scenario to draw their conclusions,” said Doug Duncan, chief economist for the Washington group. “We don’t share that degree of pessimism.”

Minorities are going to suffer as well, thanks to the sub-prime market, according to a report from News10 of Sacramento. “Nationwide, 50 percent of African-Amercians who took out mortgages in the past five years did so on subprime loans. Latinos did so at a rate of 40 percent.” In addition, ” 10 percent of the African-American borrowers and 8 percent of Hispanic borrowers will be affected by foreclosure. In contrast, only 4 percent of recent white borrowers are expected to be affected.” (New York Times

Along similar lines, the sub-prime lending trend is going to hit many markets around the country. InsideBayArea.com reports:

East Bay subprime borrowers have a 21 percent likelihood of losing homes to foreclosure over the life of the loan, said the study from the Center for Responsible Lending.

Subprime loans are becoming increasingly popular. Out of the nearly 1.8 million loans taken out in 2005 in California, more than 400,000 were subprime loans, and 21.4 percent of those are projected to end up in foreclosure . . .

Nationally, borrowers who took out subprime loans to buy or refinance a home over the last two years have a 1 in 5 chance of losing their homes, compared with a 1-in-10 rate for subprime loans taken out in 2002, the report said.
Among 378 metropolitan areas, San Joaquin County had the seventh-highest projected foreclosure rate for subprime borrowers who took out loans in 2006. Merced County was No. 1 nationally.

The future outlook for Maryland foreclosures isn’t looking good, according to The Baltimore Sun:

The findings are especially worrisome for Baltimore, where – according to one recent survey – about half of mortgage loans made to homebuyers in recent years are subprime.

Maryland, which has one of the nation’s lower foreclosure rates, will have the ninth-highest share of eventual foreclosures among subprime loans originated in the first nine months of this year – 20.6 percent. Nevada’s figure of 23.7 percent will top the list

No one can really redict the future, but from the look of things, the outlook is pretty dire for a huge block of subprime borrowers. At the same time, I can hear the roar of patient investors just waiting to scoop up properties at prices unseen in some years. I guess the saying “One man’s pain is another man’s pleasure” applies to the real estate market afterall.

About Author

Joshua Dorkin

Joshua Dorkin (@jrdorkin, Google+) founded BiggerPockets.com when he saw a need for free, trustworthy information about real estate investing online. Over the past 12 years, Josh has grown the site from self-funded hobby to full-time job and passion. Today, BiggerPockets brings together over 600,000 members, housing the world’s largest library of real estate content, iTunes’ #1 real estate podcast, and an array of analysis tools, all geared toward helping users succeed.

6 Comments

  1. Hmmm…there is not an agree upon definition of foreclosure? Foreclosure in Illinois begins when the notice of default, ‘lis pendens’ is filed. That is the strict definition of foreclosure- if someone wants to create their own definition that is fine, but inaccurate. You can find accurate statistics for Chicagoland foreclosures at the Illinois foreclosure listings service, http://www.ilFLS.com.

  2. I am a local realtor in the sacramento area and we have seen many sub-prime loans for many years. This is all fine if the party knows how to handle them. My fears are the worst is yet to happen when many of the short term loans (teasers) come up for renewal.

    Rick Stalker

  3. ForeclosurePro – the issue is when the foreclosure process starts ACCORDING TO THE STATISTICS. The foreclosure sites may be using different time horizons to define their stats.

    Rick – The problem is that many people don’t get properly warned about the dangers of teaser loans.

  4. Pingback: Real Estate Dispatch - Christmas Eve Edition - 12/24/06 | Real Estate Investing for Real Blog

  5. The whole loan market in the UK is now seeing a similar trend to the USA. Figures quoted today show that house repossessions have increased sharpy and lenders and now starting to get tough with borrowers in arrears. This appears to be a direct result of lenders finding it increasingly difficult to borrow from other lenders. Ultimately the consumer will suffer.

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