In this report, we examine foreclosure trends in the subprime market and provide the first comprehensive assessment of how homeowners have fared in the fast-growing subprime mortgage market. Our research analyzes the performance of more than six million subprime mortgages from 1998 through 2004 and projects lifetime cumulative subprime foreclosure rates for each annual cohort of subprime loans from 1998 through 2006. We investigate patterns of subprime foreclosures and, based on housing appreciation forecasts from Moody’s Economy.com, project subprime foreclosure rates and losses for homeowners.

Our results show that despite low interest rates and a favorable economic environment during the past several years, the subprime market has experienced high foreclosure rates comparable to the worst foreclosure experience ever in the modern prime market. We also show that foreclosure rates will increase significantly in many markets as housing appreciation slows or reverses. As a result, we project that 2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process. Further, we find that many features of typical subprime loans substantially increase the risk of foreclosure, regardless of the borrower’s credit history.