Last year, more than a million families lost their homes to bank foreclosures -- a 42 percent jump over 2005, according to RealtyTrac. That's still a small percentage of homeowners. But it marks a huge increase in foreclosures -- especially among recipients of what are known as sub-prime loans. These are borrowers with weak credit ratings. They're mostly poor and minority, or young first-time home buyers. All have stretched their budgets to the limits to afford a home.
Unfortunately, we're likely to see even more of them lose their homes this year.
A few years ago, banks were awash in money. They were eager to give mortgages to almost anybody who applied. And investors were all too happy to get high yields from mortgage-backed securities. The result was an explosion of sub-prime lending -- along with all sorts of gimmicks making it easy to meet the payments, such as adjustable-rate mortgages, interest-only loans, and no down-payments, often financing 100 percent of the value of the home.
Now it's time to pay the piper and the piper's raising rates and calling in the loans. Last year's increase in foreclosures could be just the beginning. The economy is perking up, and adjustable-rates are increasing. The Mortgage Bankers Association estimates that in 2007, more than $500 billion worth of mortgages will be adjusted upward.
That's no problem if a family can refinance by getting, say, a 30-year fixed-rate mortgage that's cheaper than where the adjustable-rate ends up. But even that 30-year fixed rate is still more than where the adjustable rate was a few years ago. Some families won't be able to afford the additional payments.
Here's the real kicker. Even if they can just barely afford the added payments of a fixed-rate loan, many of these families won't qualify for refinancing. That's because the housing bubble has burst, and the value of their home is less than what it was a few years ago. They'd be trying to get a loan for more than their house is worth. But these days, mortgage lenders are refusing to do that kind of refinancing.
Banks are pulling back from risky loans precisely because foreclosures are increasing -- which means ... more foreclosures. According to a report issued last month by the Center for Responsible Lending, one in five sub-prime loans made in the past two years will end in foreclosure. That's about 2.2 million borrowers who are likely to lose their homes.
Who knows where it will end? Only one thing is clear. Mortgage lenders and investors will come out okay. At worst, they'll have properties they can resell. But meanwhile, millions of families who thought they had found the American dream are ending up in a nightmare.
The anything-goes lending practices of the past few years has made many creditors and investors very rich. But it is taking a large toll on the poor and near-poor. The responsibility of bank regulators isn't just to maintain the solvency of the financial system. It's also to help Americans buy homes -- and keep them.
Robert Reich is a Prospect co-founder. This column is adapted from Professor Reich's weekly commentary on American Public Radio's Marketplace. His website can be found here and his blog can be found here.
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