Soaring loan defaults forecast

A reader writes:

Hi Ken –
Last night’s news made a big deal about home loans going into foreclosure in the Sac/Placer county areas. I know you’ve touched on this in the past few weeks, but what, if any, effect will this have on interest rates and qualifications for 1st time home buyers. Are we looking at some “good buys”, or just more inventory?

Hi Sandie, I read the newspaper article this morning. The article was not worthy of the “above the fold position” it received in the Bee. Like much that is reported by the major news media, there is more to the story that wasn’t printed.

The North Carolina based non-profit group, The Center for Responsible Lending, has a political ajenda. They would like to do away with all sub-prime loans. There are a higher percentage of minority sub-prime borrowers than non-minority and the Center for Responsible Lending believes lenders are intentionally discriminating against minorities and pushing them into sub-prime loans. The conclusion in their recent report is that defaults and foreclosures will increase among mostly minority borrowers because of discriminating practices.

There is no question that we will see higher foreclosure rates on sub-prime borrowers regardless of the racial status. That’s why they are called “sub-prime” loans! The interest rates and fees are higher than they are on prime loans. The report says that 21 percent of sub-prime borrowers in Sacramento and Oakland are projected to go into default.

While some neighborhoods in Sacramento may experience an increase in foreclosures, the capital region will not have a significant number. Most independent and recognized sources of real estate data, predict a lower number of defaults in California than will be experienced nationally.

Once upon a time, if a borrower had bad credit they could not get any type of home loan. The home ownership rate was 50 percent for all families and the home ownership percentage of minorities was less than 20 percent. Then, sub-prime and creative lending came along. Today the percentage of families who own their own home is 70 percent (the highest ever) and for minorities it is 40 percent. The system for poor credit risk borrowers isn’t perfect but at least it is a vehicle for them to obtain a home loan at rates well below what we all pay on our credit cards.

Even if the Center for Responsible Lending is on target with their predictions of a 20 percent default rate among borrowers (who 30 years ago would not even be considered for a loan) that would mean that 80 percent of poor credit risks borrowers do own a home today because they were able to get some type of loan in order to buy one.
Some discrimination and steering of borrowers to sub-prim loans may exist in lending but I suspect it is few and the penalties are severe. The competition for a borrowers loan business is fierce. With the Internet and the plethora of lenders both prime and sub-prime borrowers have many choices as to who gets their business.
I believe the Center for Responsible Lending is over stating a potential problem. Our region continues to create jobs, our population continues to grow and anyone who wants a job can easily find one. All good signs for an expanding housing market.