Ripple effect is feared from foreclosures

Neighboring houses likely to lose billions

November 14, 2007|By Lorraine Mirabella and Jamie Smith Hopkins | Lorraine Mirabella and Jamie Smith Hopkins,Sun reporters

Foreclosures on subprime home loans made to borrowers toward the end of the housing bubble will erase billions of dollars in value from neighboring properties, according to a report released yesterday by a nonprofit group.

The Center for Responsible Lending used its findings to call for Congress to enact stronger protections for borrowers facing foreclosure - such as giving bankruptcy courts the authority to allow borrowers to continue making payments - and to take steps to prevent predatory lending practices.

The center's report estimates about a third of homes nationwide - or 44.5 million homes - will see property values drop by an average $5,000 two to three years after the foreclosures of loans originated in 2005 or 2006. It estimates the total loss at $223 billion, with the greatest impact in neighborhoods with high concentrations of minority residents, who tended to be steered into subprime loans in greater numbers.

The study ranked Maryland sixth worst in the nation, with some 1.43 million properties - more than half the state's total - expected to lose $8 billion in value. California was ranked No. 1.

The estimate for Maryland was much higher than that issued last month by the Joint Economic Committee of Congress.

The committee estimated the total loss of state property values at $2.7 billion, of which about $1.1 billion was the ripple effect on nearby homes. That report forecast subprime foreclosures from the middle of this year through the end of 2009.

The Center for Responsible Lending's study projects more than 329,000 homes will lose value because of their neighbors' subprime woes in an area that includes mostly Baltimore City, with some spillover of properties in Baltimore and Anne Arundel counties. In the metropolitan area's five surrounding counties, nearly 483,000 homes will lose value, the study said.

Maryland homes will lose an average $5,597 in value, it said, ranging from an average of $9,366 in Prince George's County to an average of just under $1,000 in Allegany.

"Subprime foreclosures continue to spread throughout the country like a disease epidemic, and the losses are affecting more and more families who've lost their homes, and these losses extend to the neighbors," said Martin Eakes, the center's chief executive officer during a conference call yesterday.

Eakes blamed lenders who pushed borrowers into subprime loans, generally given to people with weak credit who then pay higher fees or interest.

Joanna Smith-Ramani, co-chair of the Baltimore Homeownership Preservation Coalition, said the number of homes the center predicts will be negatively affected is "frightening." She fears that rising foreclosures might "paralyze" revitalization efforts in the city.

Jay Brinkman, a financial economist with the Mortgage Bankers Association, which represents prime and subprime lenders, said he found flaws in the report. Price declines typically lead to more foreclosures, not the other way around, he said.

"The idea of associating price declines with foreclosures is not a valid argument, the way they have done it here," said Jay Brinkman, a financial economist with bankers association. "The way they attempted to reach out and apply it over 44 million homes is not valid."

Richard P. Clinch, director of economic research at the University of Baltimore's Jacob France Institute, said rising foreclosures and falling property values both are consequences of the popping of the housing bubble, not cause and effect.

"As the bubble bursts, property values fall," Clinch said.

Thomas E. Perez, co-chair of the Maryland Homeownership Preservation Task Force, said he can't comment on the center's figures but agrees with the premise that the effects of foreclosure reach far beyond the people losing their homes.

"The impacts are so wide-ranging," said Perez, the state's secretary of labor, licensing and regulation. "The ripple's really what we talk about. That is why it's so critical to get a handle on it."

Phillip Robinson, executive director of Civil Justice Inc., which has a network of attorneys who help clients with foreclosures, said the study may be a wake-up call for homeowners who've never had a subprime loan and expect their homes will always rise in value.

lorraine.mirabella@baltsun.com jamie.smith.hopkins@baltsun.com

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