The worst of the subprime mortgage fallout has yet to come, and rising foreclosure levels will likely push down the values of 81 percent of District homes by an average of $10,836, according to a national study released this week by the nonprofit Center for Responsible Lending.
The group predicted 2,150 District homes — still fewer than 1 percent of homes in the city — will enter foreclosure as a result of high-cost mortgage loans made to borrowers in 2005 and 2006, Those losses will dampen the values of surrounding homes, rippling across the city.
The effects will be worst in neighborhoods with heavy minority populations because the majority of high-cost loans were made to black and Latino homeowners, according to CRL.
“In January ’08, you’ll have major heat taking off in terms of foreclosure starts and delinquencies,” said Aracely Panameño, CRL’s director of Latino affairs, adding that 23 percent of home loans to D.C. area residents in 2006 were high-cost.
High-cost loans, which are sometimes referred to as subprime loans, often come with low initial interest rates that jump drastically after two or three years, at which point many homeowners find themselves unable to afford their mortgages, triggering foreclosure.
The majority of homeowners who took out these loans in 2005 and 2006 — the peak time during which lenders were issuing them — will see their interest rates skyrocket next spring and summer, expert say, which is when foreclosure numbers are predicted to swell.
D.C.-area borrowers took out more than 54,000 high-cost loans in 2006 and more than 61,000 in 2005, according to federal home loan data.
By comparison, D.C.-area homeowners took out 27,000 high-cost loans in 2004. The region’s strong economy, which was thought to shield it from dramatic housing fluctuations, actually contributed to its worsening foreclosure situation, said James Carr, chief operating officer of the National Community Reinvestment Coalition, which is advocating for tougher federal lending regulations.
“What happened was in this area, directly as a result of the strong economy, we had house prices going out of control,” Carr said.
Even middle-class buyers turned to high-cost loans to finance homes they couldn’t really afford, hoping that house values would continue to rise and they could refinance, he said.
“That way of underwriting should not be allowed because it requires that you gamble on the house,” Carr said. “The house prices weren’t sustainable, and the financing structures weren’t, and it’s now kind of all imploding.”
Predicted effects of 2005 and 2006 subprime loans
Alexandria
Number of foreclosures: 261
Number of homes whose values will drop: 42,018
Average value drop per home: $8,465
Arlington
Number of foreclosures: 254 Number of homes whose values will drop: 47,219
Average value drop per home: $5,952
District
Number of foreclosures: 2,150 Number of homes whose values will drop: 223,797
Average value drop per home: $10,836
Fairfax
Number of foreclosures: 3,381 Number of homes whose values will drop: 221,209
Average value drop per home: $5,558
Montgomery County
Number of foreclosures: 4,003 Number of homes whose values will drop: 232,024
Average value drop per home: $5,698
Prince George’s County
Number of foreclosures: 13,172 Number of homes whose values will drop: 296,522
Average value drop per home: $9,366
Source: Center for Responsible Lending
