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Price tag of mass foreclosures: $223 billion

An expected surge in home foreclosures will cause U.S. property values to sink by $223 billion, with the most severe impact in minority communities, a new report says.
/ Source: The Associated Press

An expected surge in home foreclosures will cause U.S. property values to sink by $223 billion, with the most severe impact in minority communities, a new report says.

The report released Tuesday by the Center for Responsible Lending estimates that roughly one in three households will see their property values drop by $5,000 on average as mortgages made to borrowers with weak credit in 2005 and 2006 reset at higher interest rates, accelerating the pace of foreclosures.

Property values and tax revenues will decline most sharply, the center said, in neighborhoods with lots of minority residents, who received a disproportionate share of such mortgages. The report's authors asserted that foreclosures have a negative effect on surrounding properties, raising the risk of fire and vandalism.

"These foreclosures are wiping out wealth that people often took a lifetime to build," said Martin Eakes, the center's chief executive. "Many families will never achieve homeownership again"

The Durham, N.C.-based center is pushing for legislation up for a House vote Thursday that would ban abusive lending practices, such as steering homeowners into refinanced mortgages that don't provide any benefit.

Advocacy groups say poor and minority borrowers who qualified for traditional loans were nevertheless steered into mortgages that reset to dramatically high levels after a short "teaser" period.

These practices "succeeded in wrecking the futures of hundreds of thousands of homeowners and their families," said Shanna Smith, executive director of the National Fair Housing Alliance.

Experts project that between 1 million and 2 million of those loans will wind up in foreclosure.

The center's property value analysis was based on academic research indicating that a foreclosure lowers the price of neighboring properties by 0.9 percent on average. That impact was higher in poor neighborhoods, where prices dropped 1.4 percent on average.

It comes as Wall Street investors and homeowners alike try to gauge the ultimate impact of the mortgage market's troubles, which started early this year among borrowers with weak, or subprime, credit and have expanded to other loans.

Federal Reserve Chairman Ben Bernanke told lawmakers in Washington last week that nearly 2.3 million subprime mortgages will reset at higher rates — and often dramatically higher monthly payments — through the end of next year.

This month, major banks including Citigroup Inc., Merrill Lynch & Co and Morgan Stanley have revealed massive losses on investments linked to the U.S. mortgage market.

Bad mortgage debt may cost banks as much as $400 billion by the time the credit crisis, Deutsche Bank wrote in a research report Monday, estimating that among the $1.2 trillion in subprime mortgage loans outstanding, up to percent could reach default, forcing losses of $150 billion to $250 billion.

The number of U.S. homes in foreclosure more than doubled in the third quarter, Irvine, Calif. based RealtyTrac Inc. said earlier this month. A total of 446,726 homes nationwide were affected by some sort of foreclosure activity from July to September, nearly doubling from 223,233 properties in the year-ago period.