Foreclosure crisis is just beginning

There has been a flood of news headlines recently about skyrocketing foreclosures in the subprime mortgage market, which serves people with lower incomes or blemished credit histories. In response, the mortgage industry trade association and the Federal Reserve Bank have rushed to reassure us that these foreclosures are just a "speed bump" on the highway to homeownership that subprime lending supposedly provides.

But they're wrong. We're just seeing the beginning of the foreclosure crisis. My organization, the Center for Responsible Lending, estimates that 2.2 million borrowers who got subprime loans since 1998 either have lost or will lose their homes through foreclosure over the next few years. This includes one of every five borrowers who got subprime loans in 2005-06, a default rate unmatched in the history of the modern mortgage market.

What does this mean locally? In the past, both the Philadelphia and South Jersey areas have seen strong housing appreciation - house prices climbed 70 to 80 percent over the last five years. This has been a boon to subprime homeowners who fell behind on their loans because they were able to tap into this increased home equity to refinance their loans or sell their homes at a profit. But double-digit house price growth is a thing of the past, and foreclosures in these markets are climbing.

In the Philadelphia area, annual housing appreciation is now running at about 5 percent versus 14 percent in 2004 and 2005. As a result, we expect almost 17 percent of Philadelphia area borrowers with recent subprime loans to lose their homes through foreclosure. We expect similar results in the Camden area (which includes Burlington, Camden and Gloucester Counties), where yearly housing appreciation has dropped from 16 percent to 6 percent.

While the rapid run-up in home prices in Philadelphia and South Jersey may have protected existing homeowners from foreclosures in the past, they also made housing unaffordable for many people trying to buy a home. Unfortunately, as these consumers tried to "stretch" to get into expensive houses, they were met by subprime mortgage lenders and brokers all too happy to help them do it.