8.1 million homes—16 percent of all U.S. mortgages—could foreclose in coming years, according to a recent forecast by Credit Suisse. For more on this, read the following article from Housing Wire:
A recent Credit Suisse research and analytics report has predicted that 8.1 million homes—16 percent of all mortgages—will be in foreclosure in the next four years, up from the 6.5 million estimated in April. “At the time, most viewed our forecast as being overly gloomy,” the reports authors wrote in reference to the April forecast. “However, based on the trends in delinquencies we were observing, the growing negative equity and our home price forecast, the forecast seemed reasonable.”
So, while 8.1 million might seem like a severe estimate, it’s actually modest considering it “doesn’t fully take into account the consensus increase in the unemployment rate to 8 percent,” according to the report. Accounting for the unemployment rate, the forecast is adjusted to 9 million foreclosures “under a recession” but increases to 10.2 million foreclosures under “a more severe recession” in coming years.
Outside of unemployment, other factors were predicted to affect the housing market, including continued downward trends in home prices. The report predicted that home prices will continue to decline, sinking even more borrowers underwater on their payments—causing them to owe more on their homes than they are worth. The report predicts 72 percent of subprime borrowers will have negative equity in their homes in the next two years, up from 48 percent that had negative equity as of September 2008. Sixty-two percent of Alt-A borrowers (up from 41 percent in September) and 83 percent of Option ARM borrowers (up from 66 percent in September) are projected to have negative equity in the next two years.
“[The U.S. Treasury Department] is developing a plan which could reduce mortgage rates to as low as 4.5 percent to encourage new home purchases,” the report read in part. “We believe that Treasury should target an even lower rate in foreclosure hot zones where entire neighborhoods are at risk.”
The report authors said expanding loan modification efforts may have a positive effect on reducing future foreclosures, although they acknowledged “modified loans remain a small percentage of delinquent loans and loans in foreclosure, even though servicers have ramped up their efforts in recent months.”
The report attributes this low participation in modification programs to the stipulation that most loan mod programs require eligible properties to be owner-occupied, while some other programs require the borrower not have a second home or investment property in order to be eligible. These stipulations, combined with “rampant occupancy fraud” limits the number of loans eligible for modification. “Furthermore, since most mods programs only allow principal forbearance, borrowers deeply underwater may choose not to accept mods if they will be obligated to pay the forbearance amount upon sale of the home,” the authors wrote.
But some loans modified in even the best of cases will ultimately result in re-default and foreclosure, according to Credit Suisse’s analysts. “[T]here is considerable variation in re-default rate by type of loan modification,” the report reads. “The terms on which loans are modified going forward will also impact the re-default rate.”
This article has been reposted from Housing Wire. View the article on Housing Wire’s mortgage finance news website here.