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Subprime Meltdown Takes Toll on Home Values

Nearly one-third of all households could see the value of their homes decline by an average of $5,000 due to a nearby subprime foreclosure, according to a new study by the Center of Responsible Lending.

Over 44 million homeowners could be impacted and the "total decline in house values and tax base from nearby foreclosures will be $223 billion," the CRL issue paper says.

The Durham, N.C.-based consumer advocacy group also warns that minority communities with large concentrations of subprime borrowers could experience more severe declines in property values.

A recent congressional study estimates that two million households with adjustable-rate subprime mortgages could end up in foreclosure by the end of 2009 and lose $71 billion of their housing wealth. This Joint Economic Committee study estimates the spillover effect on nearby homeowners would be only $32 billion.

CLR chief executive Martin Eakes stressed that his group's estimates are "utterly conservative" and he expects the spillover effects will be greater $223 billion.

He noted the JEC researchers did not have access to census level data. But his researchers were able to dig in and look at where the foreclosures will be located to get a "more precise number."

The advocacy group supports legislation that would allow bankruptcy judges to restructure mortgages and legislation to stop allegedly predatory lending practices.

The CRL study is based on an academic study that found one foreclosure in a neighborhood could reduce surrounding property values by 0.9%. Properties values decline by a higher factor (1.44%) if there are multiple foreclosures in a neighborhood. But CRL did not use the 1.44% factor.

The study also is based on CRL projections that 19.4% of subprime loans originated in 2005 and 2006 will end up in foreclosure and 1.1 million mortgage borrowers could lose their homes.

"By any measure, the epidemic of home losses is severe, and will not only harm families who lose their homes, but also nearby homeowners who suffer drops in their property values," the CRL paper concludes.

The advocacy group supports legislation that would allow bankruptcy judges to restructure mortgages and legislation to stop predatory lending.

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