Nearly a fifth of consumers with bad credit who borrowed money to buy a house in the past two years will default on their mortgages and lose their homes, an industry survey projects.
A study released Tuesday by the Center for Responsible Lending found subprime mortgage loans, or loans to consumers with blemished or limited credit histories, have become riskier due to a cooling housing market and relaxed lending standards.
CRL, a nonprofit research organization that fights predatory lending practices, predicted lenders will foreclose on 19% of the subprime mortgage loans issued in 2005 and the first three quarters of 2006.
Subprime mortgage lenders have little incentive to ensure the creditworthiness of borrowers, CRL said. Lenders pool home loans and sell them as mortgage-backed bonds, placing the risk of default with investors in the secondary market. Therefore, lenders' only incentive is to issue as many loans as possible.
Lenders accomplished this during the housing runup by offering exotic mortgages with structures attractive to borrowers with bad credit, such as loans in which high payments don't kick in until a few years after the loan.
As housing prices skyrocketed over the past few years, many consumers borrowed beyond their means to buy a home. Lenders issued more than $900 billion in subprime mortgage loans during 2005 and the first three quarters of 2006, comprising a fourth of the mortgage market, according to the CRL.
When housing prices rise, borrowers having trouble with their mortgage payments can borrow against the value of their home to pay off the loan. As prices fall, distressed borrowers will no longer be able to refinance or sell their homes to avoid foreclosure, CRL said.
Last week, the Mortgage Bankers Association reported the delinquency rate for mortgage loans shot up in the third quarter.
Mortgage lenders with big subprime operations include Countrywide Financial, Accredited Home Lenders Holding, New Century Financial, Thornburg Mortgage, and American Home Mortgage Investment. Wells Fargo and H&R Block also have subprime mortgage operations.