Study Predicts 1.1 Million Foreclosures

Recent home buyers, many seduced by a low teaser rate, are finding that all good things must come to an end. For more than a million of them, they could end in foreclosure, according to San Francisco Chronicle.

Americans borrowed $2.2 trillion from 2004-2006 in the form of adjustable rate mortgages, which start with low monthly payments that reset to higher rates.

As those mortgage loans reset, 1.11 million people will lose their homes, according the study by First American CoreLogic, a firm that tracks home mortgage risk for the financial services industry.

Stunning as it may seem, that figure is significantly less than a widely published number from the Center for Responsible Lending.

As prices appreciated rapidly, buyers turned to adjustable-rate mortgage that made it easier to afford high-priced homes, at least initially.

But a slowdown in the housing market means that buyers who took out the loans as the boom was coming to an end made little or no money off their investments.

It’s those borrowers who are most likely to wind up in default because they won’t be able to engage in mortgage refinancing or sell their homes at a profit to cope with higher monthly payments, the report found.

Unlike a lot of other research about bad credit mortgage loan risk that has roiled Wall Street during the past few weeks, the First American report did not find the problems with risky loans to be limited to subprime borrowers, or people with poor or little credit.

The largest group of home loans likely to go into default are those that started with extremely low teaser rates regardless of whether borrowers had high or low credit scores, the report finds.

“This isn’t just subprime,” said Christopher Thornberg, economist with the consulting firm Beacon Economics in Los Angeles.

“This problem is starting to occur in most of the adjustable-rate mortgages. Even for the prime rate borrowers, we’re seeing a big spike in delinquencies among adjustable-rate mortgages.”

The findings paint a different picture than a study done by the Center for Responsible Lending in December, which estimates 2.2 million bad credit mortgage borrowers alone would lose their homes in the next few years.

The non-profit advocacy group, bases its estimate on the assumption that the housing market will decline during the next several years while First American assumes that prices will remain flat.

The study does not break out statistics by region, but the Bay Area will be hurt less than other parts of California and the country as a whole, said Christopher Cagan, director of research for First American CoreLogic and the study’s author.

SOURCE: San Francisco Chronicle