One-fifth of the "subprime" mortgage loans that Marylanders took out this year will end in foreclosure and home loss, according to a report released yesterday that predicts problems nationwide.
Subprime borrowers typically are those who have credit problems and pay higher interest rates as a result.
The estimates, by the Center for Responsible Lending, reflect the end of the housing boom and come at a time when subprime lending has grown rapidly to about 20 percent of new loans.
As home prices have stalled or dropped around the country and the pace of sales has slowed in recent months, newer homeowners have less ability to refinance or sell quickly to dig themselves out in case of financial trouble.
The findings are especially worrisome for Baltimore, where - according to one recent survey - about half of mortgage loans made to homebuyers in recent years are subprime.
The center, a nonprofit critic of predatory lending, predicts that 19 percent of subprime loans made to Americans in the past two years for primary residences will eventually end in foreclosure and home loss, affecting 2.2 million households. Many will be African-American and Latino because a disproportionate share of subprime borrowers are from those minority groups, the center said.
Meanwhile, homeowners who refinance from those loans into new subprime mortgages will have an even higher chance of losing their property, according to the study.
About 1 percent of all loans and just under 4 percent of subprime loans were in various stages of the foreclosure process in the third quarter of this year, according to the Mortgage Bankers Association.
The worst foreclosure rate in the modern mortgage market was about 15 percent in the oil-patch states of Arkansas, Louisiana, Mississipppi and Oklahoma during the 1980s, the center said in its report. Just under 10 percent of subprime loans made in 1998 had been foreclosed upon by mid-2005, it said.
States coming off hot housing markets over the next couple of years will fare worst, the center believes.
It projects that Maryland, which has one of the nation's lower foreclosure rates, will have the ninth-highest share of eventual foreclosures among subprime loans originated in the first nine months of this year - 20.6 percent. Nevada's figure of 23.7 percent will top the list, the center said.
The report predicts that a bit more than 19 percent of subprime loans issued this year in the Baltimore region will end in foreclosure. That's not as high as the Washington area - ranked ninth-worst among metros at nearly 23 percent - but it would be a sharp increase for Baltimore.
"Subprime lenders are selling the most dangerous loans to the most vulnerable borrowers, creating the largest rash of foreclosures in the modern mortgage market," said Michael D. Calhoun, president of the center, which is advocating regulatory changes to do away with features of many subprime loans it considers risky.
The Mortgage Bankers Association, which represents prime and subprime lenders, opposes many changes that the center supports, arguing that they could limit credit to borrowers. It isn't sold on the projections, either.
"I confess I'm a little puzzled," said Mike Fratantoni, senior economist with the association. The trade group, which releases statistics on foreclosure rates in each quarter rather than over the life of certain loans, expects modest increases through mid-2007, followed by a leveling-off.
The center said it projected future foreclosure rates using a formula that included housing appreciation forecasts by Moody's Economy.com, proprietary data about loans when they were originated and payment patterns over time, and past relationships between foreclosures and housing price appreciation.
Several independent experts said the center's forecasts, though disturbing, seem reasonable.
"It's based on very sound assumptions," said Greg McBride, senior financial analyst with Bankrate.com, who read the report yesterday. "Let's hope it's one of those worst-case scenarios that never comes to pass."
Mark Zandi, chief economist of Economy.com, said he too expects significant increases in subprime loan defaults, fueled by "bad underwriting," weaker house prices and a softer job market. He forecasts that housing prices will fall through most of next year, remain flat in 2008 and start seeing measurable gains only in 2009.
Nervous regulators and lenders now are tightening standards, he said. Though that's good news down the road, it's bad for people stuck in mortgages they can't afford, he said:
"It's going to be harder for homeowners ... to refinance out."
Baltimore is a high-foreclosure city, but overall rates have so far remained low statewide. Maryland's high levels of employment and expectations for strong job growth - in part thanks to military base restructuring that will send thousands of jobs to the Baltimore area in the coming years - act as buffers against a huge rise in home losses.
But the center believes recent buyers with subprime loans are at risk even if they don't lose a job, get divorced or go through other trauma that can lead to foreclosure. Eight out of 10 subprime loans have interest rates that will adjust upward after a set period, often two years, said Keith Ernst, senior policy counsel at the center. Monthly payments can then increase as much as 40 percent, he said.
And in Maryland, where average home prices have barely budged recently after jumping nearly 20 percent last year, many recent home buyers have little or no equity to help get out of a tight spot.
Carol Gilbert, co-chairman of the Baltimore Homeownership Preservation Coalition, thinks the state needs to offer temporary loans to homeowners in danger of losing their homes; to better promote its new "lifeline" refinancing loan that can get Marylanders out of bad mortgages; and to help connect more people with nonprofit housing counselors.
"It's very troubling, but there are some things we can do," said Gilbert, also a program officer with the Goldseker Foundation.
Vinnie Quayle, executive director of the St. Ambrose Housing Aid Center in Baltimore, said he's also worried about the residents who won't show up in the foreclosure statistics but will lose their homes just the same - to "foreclosure rescue" con artists pretending to offer assistance.
But the root of the problem is that residents have taken out loans they clearly cannot afford over the long term, he said.
Pat Vredevoogd Combs, president-elect of the National Association of Realtors, said high foreclosure rates harm neighborhoods as well as residents. Foreclosures can lead to vacancies, which drag down property values.
Speaking in support of the report's conclusions, she said: "We want to make sure that Americans who achieve the dream of homeownership do not see it turn into their worst nightmare."