(Update 1: clarifies some numbers, adds color on subprime foreclosures)
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 [original] forecast as being overly gloomy," a team of analysts, led by Rod Dubistsky, 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."
This current forecast -- eye-popping enough as it is -- may also yet end up being too conservative, the report suggested. The analysts said the revised estimate still doesn't fully consider an expected increase in unemployment to 8 percent; should levels reach that high, Credit Suisse said it expects to see 9 million foreclosures. That number could even reach 10.2 million under a more severe recessionary scenario, if unemployment heads north of 8 percent as some economists now believe possible.
Of course, unemployment is but one factor that drives foreclosure activity -- 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 mortgage debt, with prices falling nationwide 10 percent over the next 12 months. 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 Sept. 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.
Perhaps most telling in the report however, is the insinuation that the nation's housing problems are likely to extend well beyond the subprime arena in coming years: Dubitsky and his assume that by 2012, only 20 percent of 1.8 million in forecasted foreclosures will be due to subprime mortgages. As a well-known blogger has taken to saying, we're all subprime now
In fact, the team of analysts projects that over the next four years, only 35 percent of foreclosure activity will be considered "subprime." Much of that has to do with the wide-reaching effects of a retrenchment -- and, in some areas, outright collapse -- of housing prices, which make borrowers of all credit classes vulnerable.
Attempting to stem the tide
The report's 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."
-- Paul Jackson contributed to this report.
Diana Golobay at firstname.lastname@example.org