Consumer Law

Exploding Mortgages

By Alan White

By Alan White

Of all the subprime mortgages ever made from 2000 through 2007, 14% have been foreclosed already, another 4% are in foreclosure now, and another 9% are now delinquent, for a total of a 27% failure rate.  In fact, the true failure rate is probably worse.  About 58% of all subprime mortgages were prepaid at some point when homeowners refinanced or sold their houses.  Some of the loans used to refinance prior loans ended up in the default and foreclosure categories, and some of the sales were distressed. Only one third of outstanding subprime mortgages are still being paid on time.

These numbers are from a recently announced GAO report which compiles comprehensive outcomes data on alt-A and subprime mortgages from the Loan Performance database, and will provide an invaluable resource for scholars.

The 27% failure rate is not just for ARMs, or just for 2007 subprime loans, or just for no-doc subprime loans, it is for all subprime mortgages made since 2000.  I argued in a paper two years ago (The Case for Bannig Subprime Lending) that on balance the harm caused by subprime mortgage lending considerably outweighed any benefits it provided.  It is hard to imagine now what benefits could have outweighed a 27% lifetime foreclosure rate, and the resulting loss of nearly 2.5 million homes.

Full post as published by CL&P Blog on January 17, 2010 (boomark / email).