Report: Central Valley leads nation in foreclosure risks

DURHAM, N.C.
December 20, 2006 6:08am

Holders of so-called “subprime” mortgages are in danger of losing their homes, especially in the Central Valley, according to a report from the Center for Responsible Lending.

As much as $164 billion in mortgages is at risk due to foreclosures in the subprime mortgage market, it says.

With 25 percent of the mortgages issued this year being subprime, Merced County ranks as the nation’s most risky area for foreclosures, according to the report.

Other Central Valley areas are not much better, it says.

Bakersfield ranks second in the nation; Fresno is fifth; Stockton is seventh and Visalia-Porterville is 13th.

In contrast, Yuba City ranks 152; Sacramento 28; Modesto 205; Madera 29; and Hanford-Lemoore, 152.

“We project that one out of five (19 percent) subprime mortgages originated during the past two years will end in foreclosure. This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the ‘Oil Patch’ disaster of the 1980s,” the report says.

The organization says its study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006.

Factors driving subprime foreclosures include adjustable rate mortgages with steep built-in rate and payment increases; prepayment penalties; limited income documentation; and no escrow for taxes and insurance, the report says.

“We also determine that these features cause a higher risk of default regardless of the borrower’s credit score,” it says.

Recent high appreciation in many areas has masked problems in the subprime market, it says.

“The cooling housing market will cause failure rates to rise sharply in many major markets. California, Arizona, Nevada, and greater Washington, D.C., will be especially hard hit,” the report says. “Now that the housing boom has cooled, fewer delinquent borrowers will have the equity needed to refinance their loan or sell their home to avoid foreclosure. Our results confirm that foreclosures are more likely in housing markets with lower house price growth.”

But the California Association of Mortgage Brokers takes issues with the foundation of the report. The CAMB says subprime borrowers can get into financial trouble for many reasons other than how their mortgages are structured.

And a company that has monitored California home sales trends since the 1980s says it doesn’t see any looming disaster.

“Market stress indicators are largely flat: Down payments are stable, speculation buying is moderate, there are no significant shifts in market mix and default rates are rising, but still in the normal range,” says DataQuick Information Systems of La Jolla in its report on November’s home sales. “Earlier increases in non owner-occupied purchase activity and flipping activity have leveled off. The use of adjustable-rate mortgages is flat.”

The Center for Responsible Lending, based in Durham, N.C., describes itself as “a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.”