"The High Cost of Subprime Lending" Part 3: Future of Housing Crisis in Washington

On Monday, the Budget & Policy Center released a paper entitled, "The High Cost of Subprime Lending in Washington State." Over the week we have posted here about the disproportionate effects of high cost lending on certain lower income neighborhoods and people of color. Today we will take a look at the future of the housing crisis in Washington State.

Washington has been relatively fortunate to avoid some of the deepest mortgage problems seen in other states as a result of the subprime lending crisis. Nationwide in the third quarter of 2008, over five percent of mortgages were seriously delinquent or in foreclosure, whereas in Washington, foreclosure rates were below 2.5 percent. (Only seven states in the country had such low foreclosure rates during this time.)

But the housing situation in Washington may take a turn for the worse in the near future. Nationwide, 77 percent of subprime loans with adjustable rates have already experienced a reset of the initial interest rate. In Washington State however, only 67 percent of loans have reset (see graph) The remainder are still at the original interest rate.

In the next 12 months, it is expected that interest rates will reset on 23 percent of subprime adjustable rate mortgages in the state, a higher share during that period than nearly every other state in the nation.

Problems for strapped homeowners can be exacerbated by prepayment penalties and large loan balances. Thirty-two percent of subprime mortgages in Washington State have prepayment penalties currently in force, a higher percentage than nearly every other state. And only 10 states have larger average subprime loan balances.

This is worrisome because the subprime mortgages that are most likely to go into delinquency or foreclosure are those with adjustable interest rates. Homeowners with these loans see sudden and significant increases in their mortgage bill from one month to the next and the additional cost can lead to late payments and eventually, foreclosure.