In a recent report, consumer watchdogs claim foreclosures have yet to peak. But a new study contradicts that report and warns against any legislation that could curtail subprime credit availability.
A concerted effort to make mortgage credit less available to subprime borrowers has arisen from mortgage critics who have repeatedly claimed that a subprime foreclosure crisis existed, The Center for Statistical Research Inc. said in a research report.
The pending crisis is the centerpiece claim of previous research by the Center for Responsible Lending.
That group's December 2006 research showed that 2.2 million families who received subprime loans between 1998 and the third quarter of 2006 either have lost or will lose their homes to foreclosure.
Nearly a half million loans completed foreclosures in the subprime market between 1998 and May 2005, the Washington, D.C.-based consumer group claimed. From May 2005 until December 2006, an additional 1.7 million subprime loans would end in foreclosure.
The group stood by its numbers according an announcement Friday in response to a public statement by the Mortgage Bankers Association's chairman, John Robbins, in which "he downplayed the home losses suffered by borrowers in the subprime market and incorrectly characterized research on subprime foreclosures conducted."
Disagreeing with Robbins' suggestion that the worst is over for subprime foreclosures and that subprime lending has been a boon to homeownership, the responsible lending group said the "worst is yet to come" and that the "subprime market has been a net drain on homeownership."
Research was cited by Lehman Brothers that has projected even higher home losses -- 30 percent of subprime loans originated in 2006, the consumer group claimed.
"Our results show that despite low interest rates and a favorable economic environment during the past several years, the subprime market has experienced high foreclosure rates comparable to the worst foreclosure experience ever in the modern prime market," the Center for Responsible Lending's 2006 study stated.
Because only 9 percent of the subprime loans from 1998 through 2006 were for home purchases, and since 15 percent to 20 percent of all subprime borrowers will end up losing their home through foreclosure, "subprime lending decreases our national homeownership rate and therefore hurts, rather than helps, the goal of making more American families homeowners," the responsible lending advocacy group added.
"The MBA claims that these unaffordable and abusive loans were made in order to expand homeownership," the group continued. "In fact, these loans were made because doing so benefited the short-term financial interests of many mortgage brokers, lenders and investors. What is tragic is that these subprime loans come at great expense to the 2.2 million families who have lost or will lose their homes as a result, and the communities in which they live all across the country."
Alexandria, Va.-based The Center for Statistical Research noted that such claims have resulted in the media spotlighting that lenders have significantly tightened lending standards in reaction to pressure from the capital markets, federal banking regulators proposing aggressive regulation that could make it difficult for a large number of outstanding ARM borrowers to refinance when their loans reset, and Congress rushing to hold oversight hearings, with members promising to introduce restrictive mortgage legislation.
But the group, funded by "sources interested in the research the Center carries forward in the form of grants or contract research," said that, although measurements of foreclosures and how foreclosure levels appear can vary because there is no publicly available database that tracks all residential property foreclosures started and completed in the country, its own analysis of available data on mortgage foreclosures through the end of fourth quarter 2006 found that "hard data do not show that extraordinary or historically high levels of foreclosures in prime, FHA/VA, or subprime loans are occurring."
"While some have used a worse-case scenario to forecast historically high foreclosures in the latter part of 2007 and beyond, the data on current foreclosure levels does not confirm those forecasts," the research center added. "A major shift in mortgage lending policy to curtail mortgage credit and deny thousands of Americans access to credit should not be taken when the current data show no signs of extraordinary foreclosure levels."
It is estimated that during 2005, $512 billion in first lien loans were made to approximately 3.3 million subprime borrowers who owned their own homes, according to the new report. The following year, $391 billion was loaned to 2.5 million subprime borrowers.
Based on 2005 and 2006 levels of lending, reducing subprime mortgage credit availability by 10 percent would result in loan denial for roughly 580,000 families or 1 percent of homeowners in the country. This translates to approximately $94 billion not being made available to American consumers. If regulatory policy caused a 20 percent reduction in credit availability, the numbers would rise to about 1.1 million families being denied credit and $188 million in unavailable loans, the research center said.
The research center also cited that foreclosure start rates are all within range of foreclosure rate highs that occurred during 2001 through 2003. And because foreclosure start rates are also rising for prime and FHA fixed and adjustable-rate loans, not only in subprime fixed and ARMs, this suggests "broad economic conditions are driving the current upturn."
The research center also noted that ARM foreclosure levels for prime, FHA and subprime mortgages are more sensitive to adverse changes in current economic conditions than fixed-rate loans and that the bulk of the repayment difficulty in subprime ARMs is concentrated in regions with serious economic problems and high unemployment, "suggesting that basic weakness in the job market and economy in those regions are responsible for the majority of foreclosures."
"It remains to be seen whether extraordinarily high foreclosure rates develop during the latter half of 2007 and on into 2008-9," the research center wrote. "Although the high proportion of ARM products originated in 2004-2006 is believed to be sensitive to interest rate and home sale price levels, foreclosure rates are now nowhere near crisis levels."
The research center said prime adjustable-rate lending may also experience contraction if current trends of high delinquency and default in the subprime sector continue and that it is not unusual for financial markets to overreact following losses, but over-regulation could well hurt a significant group of vulnerable consumers and cause undesirable effects to the economy.
"The available regulatory and capital market tools are not refined," the research center warned. "As a result, not just the few people who would actually experience foreclosure would be denied credit by a restrictive regulatory policy. Instead, the whole class of borrowers in a particular risk category would be denied, even though the vast majority of them would use the credit successfully."
The center said caution appears to be the prudent course to take at the time, such as monitoring whether and to what extent the market tightens lending standards or credit availability on its own.
"Such tightening could well make new regulation both unnecessary and undesirable," the center said.