Foreclosure Threat Ominous for Subprime Borrowers

The Center for Responsible Lending, a nonprofit organization based in North Carolina, has released a study indicating that 2.2 million subprime housing loans, or 15% of the total, will end in foreclosure. The loans were issued over the period between 1998, when the housing boom began, and today, as the sector settles into a slump. The study blames lenders for making subprime loans without adequately assessing whether the borrowers would be able to pay them off once rates went up, and for failing to check the veracity of the borrowers' income declarations. In 1998, subprime loans represented 24% of the total, but today, they account for 62%. The excessive distribution of subprime loans has created a dangerous scenario: borrowers won't be able to make higher monthly payments, won't be able to refinance since the value of their homes will have declined, and won't be able to sell, since they will owe more on the houses than they are worth. These problems could lead to a hard landing for the housing sector, which could, in a worst-case scenario, contribute to an overall recession. The Mortgage Bankers Association considers the Center for Responsible Lending's study to be excessively pessimistic, maintaining that housing prices are unlikely to fall precipitously in 2007.
• Sources: Wall Street Journal, New York Sun, Business Week, The Sacramento Bee
• Related commentary: Treasury Sets New Guidelines to Stem Rising Delinquency Threat, Mortgage Applications Perking Up
• Potentially impacted ETFs: iShares S&P Global Financials (IXG), Vanguard Financials ETF (VFH), streetTRACKS KBW Bank ETF (KBE), Regional Bank HOLDRs Trust Regional Bank HOLDRs Trust (RKH)

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