Insiders Prepare for Foreclosure Increase on Bad Credit Mortgages

Foreclosures of bad credit mortgages are expected to rise dramatically in the coming months - with nearly one in five subprime borrowers at risk - according to a the Center for Responsible Lending.

Tom Adams, co-owner of Century 21 Adams & Barnes, which has local offices in Monrovia and Glendora, said he hasn’t encountered the problem very often. But he knows it’s coming.”We haven’t seen a lot of it, but it is out there,” he said. “It’s the old, ‘If it sounds too good to be true, it probably is,”‘

Adams said buyers should be wary of advertised deals that tout 1 to 2 percent mortgage interest rates.

“Common sense tells you that at some point you’re going to have to pay for that,” he said. “But the good news - except for the people who bought during the last eight to nine months - is that homeowners now have some built-in equity, so they can sell and move on.”

Subprime mortgages typically are written for families that have weak or blemished credit histories, typically carrying higher interest rates than prime mortgages.

Foreclosure occurs when a family fails to maintain payments on its mortgage and the lender moves to repossess the property that was used to secure the home loan.

Jack Kyser, senior vice president and chief economist for the Los Angeles County Economic Development Corp., noted recently that some home buyers who locked in to extremely low adjustable-rate mortgages are going to have a tough time when mortgage rates creep up.

“You’ll see a big increase in foreclosures,” he said. “But those rates are coming out of the basement.”

The report said that the chance of foreclosures on a bad credit home loan doubled between 2002 and 2005.

Subprime loans originated in 2002 have a one-in-ten chance of foreclosing, while for loans originated in 2005 and 2006, the probability increases to one in five.

Adams said low-interest and interest-only home loans are fine, providing the borrower has a long-term plan to address fluctuations in payments.

“It’s bad for the people who went into it thinking, ‘I’ll deal with it later,”‘ Adams said. “Right now there’s a lot of pent-up demand from people who have been waiting to see what happened in the housing market. But prices didn’t plummet and the world didn’t fall apart … so more people are probably thinking now is a good time to buy.”