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In this report, the Center for Responsible Lending presents research on how homeowners have fared with subprime mortgages. Analyzing the performance of more than six million subprime mortgages made from 1998 through the third quarter of 2006 and taking into account changes in housing prices, we find that foreclosure risk in the subprime market has escalated in recent years, and is likely to grow even worse in many areas.

As this year ends, 2.2 million households in the subprime market either have lost their homes to foreclosure or hold subprime mortgages that will fail over the next several years. These foreclosures will cost homeowners as much as $164 billion, primarily in lost home equity.

We project that one out of five (19 percent) subprime mortgages originated during the past two years will end in foreclosure. This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the “Oil Patch” disaster of the 1980s.

In brief, these are the key findings:

Even during the recent period of strong housing appreciation, subprime foreclosures have been high. As many as one in eight (13 percent) subprime home loans ended in foreclosure within five years of origination.

The past housing boom masked the high proportion of homeowners who have struggled with subprime loans. For many borrowers, strong house price growth increased the amount of equity in their homes and enabled them to refinance their mortgages despite being behind on the monthly payments. When these distressed prepayments are added to the foreclosure rates, the total “failure rate” for subprime loans approaches 25 percent.