316,000 Subprime Loans From California 2006 About to Receive Payment Shocks

California subprime home purchase and refinance lending levels rose in 2006. The majority of 316,769 California borrowers that received subprime loans in 2006 are likely to have their interest rates reset in 2008 and face significant payment shock. Additionally, one-third of California home purchase borrowers used a second, piggyback loan on top of their primary mortgage to finance their loans.

These borrowers took out loans on as much as 100 percent of the value of the home in 2006, and in a declining housing market these borrowers could owe more than their homes are worth.

“The high level of piggyback and subprime mortgage lending in California in 2006 could unravel in 2008 as the subprime loans reset to higher rates at the same time California’s housing market implodes, potentially putting more than a quarter million homeowners at risk of losing their homes to foreclosure,” said Allen Fishbein, Director of Housing and Credit Policy at the Consumer Federation of America (CFA).

The study examined all of the 1.2 million conventional, owner-occupied home purchase and refinance mortgage originations in all of California’s metropolitan areas in 2006. The loan level data was obtained from the Home Mortgage Disclosure Act’s Loan Application Register provided by the Federal Reserve Board. The study provides a comprehensive analysis of lending patterns for home purchase and refinance lending in California’s metropolitan areas, including the prevalence of subprime and piggyback lending among Latino, African American and Asian borrowers.

“The CFA findings indicate that thousands of distressed California homeowners will need additional tools to save their homes. Very few of these homeowners will be able to sell or refinance their homes. Voluntary industry loan modifications have been insufficient to address the magnitude of this crisis. Congress needs to step-in and do it quickly,” said Allen Fishbein.

The study recommends two key actions for Congress to take:

• Amend the bankruptcy code to permit judicial modification of mortgages to enable
families to continue paying on their loans and keep their home;

• Establish new consumer protections to restore responsible lending in order to
prevent the crisis from happening again.

Source: Consumer Federation of America

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