The risk of foreclosures rising in California is at an all time high. The fate of 5000,000 house owners is at stake. The Consumer Federation of America noted that a large majority of these loans are in the hands of Hispanics and Afro-Americans. This non-profit organization analyzed that from 2006 there has been an increase in sub-prime mortgages. It is these that are responsible for foreclosures. Most of these loans were ‘piggyback’ loans – no down payment was such was made but loans were taken again on the equity to make up for it. For two years the rate was low. After the lapse of the honeymoon period with the rise in rates the people found that they could not keep their houses. This threat of rise now looms large over another batch of borrowers numbering nearly a quarter of a million. With value of houses falling the loan amount exceeds the price of the house. The borrowers are now unable to sell off and pay off in the falling real estate market today.
About 316,769 borrowers from California took sub-prime loans in 2006. More than 90% of the loans belonged to the ARM type or adjustable rate mortgage wherein the interest would rise after two years. There were 12,672 foreclosures in the state in 2006. In 2007 it jumped to 84,375 – a phenomenal increase of 565.8%!
California Reinvestment Coalition is a consumer group concerned with foreclosure prevention for the last few years. Kevin Stein, the director, comments that according to their estimate over 500,000 house owners in California are under risk of foreclosure during the forthcoming years because their rates are all ready to reset. The figure seems to be an underestimation of the actual count of victims.
The lowering of the rate of interest might help some of the borrowers as many of the sub-prime mortgages are linked to London Interbank Offered Rate or LIBOR. The latter has been dropping its sub-prime as well as prime rates, notes Peter Ogilvie of California Association of Mortgage Brokers. He said that the crisis is intense in the San Joaquin valley together with the Mexican border area.
A sixth of all the borrowers in California made the sub-prime loans in 2006. A third of these used piggyback mortgages and these are the ones most likely to be hit first as they have no equity to fall back on.
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