That’s the depressing conclusion of a new study from the Center for Responsible Lending. It finds that 6.4% of mortgages issued between 2004 and 2008 have already ended in foreclosure, but that 8.3% of loans from that period are in serious delinquency, putting them at risk of foreclosure.
Moreover, many loans issued during those years could become delinquent and end in foreclosure, but aren’t yet in the “at risk” category. And of course, there could be additional foreclosures on loans issued before and after the key 2004-2008 period, when toxic types of loans were most common.
“The findings presented in this report suggest that we are not even halfway through the foreclosure crisis, as millions of additional families are still at risk of losing their home,” the report concludes. “Meanwhile, Americans of every demographic group – all incomes, races, and ethnicities – have been affected. Our analysis shows that non-Hispanic white and middle- and higher-income borrowers represent the vast majority of people who have lost their homes. However, we also find that people of color and lower-income borrowers and neighborhoods have been disproportionately affected.”
The single biggest factor driving foreclosures was the type of mortgage issued for the home. Hybrid loans and adjustable-rate mortgages with “option” features have a foreclosure rate of 12.8%, compared to 3.3% for fixed-rate and standard ARMs. Hybrid and option ARMs have features like rate resets within the first five years, negative amortization, or interest-only payments, all characteristics that can make future payments jump unexpectedly or cause loan principal to grow over time rather than decline.
Similarly, loans with a prepayment penalty – a charge for paying the loan off within the first few years – had a foreclosure rate of 14.7%, compared to 4% on loans without such penalties. A prepayment penalty can make it prohibitively expensive to refinance to get a better deal, trapping the homeowner in the high-cost loan.
Also, loans with high interest rates had a 15.6% foreclosure rate, versus 4.6% for loans with normal rates. A high rate was defined as at least three percentage points above rates on U.S. Treasury securities with comparable maturities.
The most toxic types of loans are no longer issued, and today’s mortgage market has tougher lending standards than during the years of the housing boom that helped trigger the financial crisis. But the hangover from that period may last for several more years yet. High foreclosure rates depress home prices and undermine the economy.
People who want to sell their homes may have to accept the fact that it could be a long time before they can get top dollar. And buyers should be wary, as a jolt to the economy from the European debt crisis or some other factor could push millions of at-risk borrowers into foreclosure, causing home prices to fall even further.
But there’s always hope. If the unemployment rate continues to drop, fewer homeowners should fall into foreclosure, and if the economy’s faint signs of improvement get stronger, lenders may ease their standards and millions of renters will look to buy. That demand could help stabilize prices, then drive them up.