Pennsylvania Mortgage Default Crisis: Just the Beginning
There has been a flood of news headlines recently about skyrocketing foreclosures in the bad credit mortgage market, which serves people with lower incomes or blemished credit histories.
In response, the mortgage industry trade association and the Federal Reserve Bank have rushed to reassure us that these foreclosures are just a “speed bump” on the highway to homeownership that subprime lending supposedly provides.
But they’re wrong. We’re just seeing the beginning of the foreclosure crisis.
The Center for Responsible Lending estimates that 2.2 million borrowers who got subprime loans since 1998 either have lost or will lose their homes through foreclosure over the next few years. This includes one of every five borrowers who got subprime loans in 2005-06, a default rate unmatched in the history of the modern mortgage market.
What does this mean locally? In the past, both the Philadelphia and South Jersey areas have seen strong housing appreciation - house prices climbed 70 to 80 percent over the last five years.
This has been a boon to subprime homeowners who fell behind on their loans because they were able to tap into this increased home equity to refinance home loans or sell their homes at a profit. But double-digit house price growth is a thing of the past, and foreclosures in these markets are climbing.
In the Philadelphia housing market, annual housing appreciation is now running at about 5 percent versus 14 percent in 2004 and 2005.
As a result, we expect almost 17 percent of Philadelphia area borrowers with recent subprime loans to lose their homes through foreclosure. We expect similar results in the Camden area (which includes Burlington, Camden and Gloucester Counties), where yearly housing appreciation has dropped from 16 percent to 6 percent.
While the rapid run-up in home prices in Philadelphia and South Jersey may have protected existing homeowners from foreclosures in the past, they also made housing unaffordable for many people trying to buy a home. Unfortunately, as these consumers tried to “stretch” to get into expensive houses, they were met by subprime mortgage lenders and mortgage brokers all too happy to help them do it.
The result? Most subprime homebuyers were saddled with adjustable rate mortgages that started with low monthly-payments all-but-guaranteed to climb after two years.
For example, a family buying a home at the average $230,000 value in the Philadelphia/Camden market would have seen their monthly payment jump from $1,522 to $2,033 after two years, and climb to $2,208 just six months later. That’s a 45 percent increase.
Some mortgage industry players and regulators contend that we shouldn’t worry about high subprime foreclosures because the market will correct itself. This is like saying to the people in New Orleans after Hurricane Katrina, “We don’t need to do anything now, because the water has gone back down.”
We need to help families everywhere - including in this region - who are struggling with foreclosures today. And we need stronger “levees,” common-sense regulations, to prevent a flood of risky or abusive subprime loans in the future.
SOURCE: The Philadelphia Inquirer