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Tanya Powley assesses the massive number of foreclosures sweeping throughout the US as the sub-prime crisis hits home with a vengeance

The effects of the US sub-prime mortgage crisis are being felt as a wave of foreclosures and evictions sweep the country.

Some cities have been particularly hit hard by the crisis, which has resulted in 1.7 million foreclosure proceedings in the first eight months of this year.

One city, Cleveland, Ohio, has been dubbed the “sub-prime capital” of the US. One in 10 homes in the city is now reckoned to be vacant and whole neighbourhoods have been blighted by foreclosed, vandalised and boarded-up homes.

Many of the areas hit by the sub-prime crisis have big black and Hispanic communities. Many homes in Cleveland are now owned by banks and invest-ment pools that have taken on the mortgages.

A report by the BBC says the company making the most foreclosures in Cleveland is Deutsche Bank Trust, which acts on behalf of investment pools.

The US Congress’s joint economic committee predicts that up to two million families are expected to lose their homes in the next two years.

Will the effects be felt in the UK? John Charcol senior technical manager Ray believes repossessions in the UK may reach 60,000 next year, more than a third higher than the Council of Mortgage Lenders’ estimate.

London & Country mortgage specialist James Cotton says: “We do not have the same toxic loans as the US, where borrowers started on a very low rate then increased quite significantly. We also need to remember that the US saw 17 rate rises in a row. We have only had five.”

The Mortgage Practitioner sole practitioner Danny Lovey says: “The mortgage lenders in the US should never have leant money to a lot of the people that are now suffering.”

Cotton notes: “In the US there have been certain areas and states that have been hit particularly hard. Here in the UK, we have problems with newbuild in places such as Leeds and Manchester but I do not think you can pinpoint any geographical location for future repossessions.”

The CML forecasts that repossessions in the UK will total 30,000, or 0.25 per cent of all mortgages, by the end of 2007 and 45,000, 0.38 per cent of mortgages, in 2008.

But it admits that forecasting in the present economic climate is an even more uncertain process.

Lovey says: “The CML may be forecasting a 50 per cent increase in repossessions but I think that is only taking into account those who have prime-ish mortgages. I think there is going to be an awful lot of problems beyond that which they have not built into the model. There are going to be a lot of people who were on sub-prime mortgages that will not now be able to get a deal.

“What worries me is that the market will not recover quickly enough to help these people. Some people are perpetually sub-prime and they are going to be the ones to struggle.”

Savills Private Finance director Melanie Bien says: “We just do not know what is going to happen. I think that a lot of people will talk to their lender and negotiate about trying to reduce payments if they are in trouble. It is not in lenders’ best interests to make repossessions as it is costly and time-consuming.”

In the US, the East Side Organising Project is trying to get mortgage companies to agree to a deal with a uniform set of criteria to decide whether a borrower qualifies for renegotiation rather than foreclosure.

Cotton says: “With financial markets, it is always a question of confidence. I do not think we are going to see the same thing happen here as in the US. The cost of borrowing has risen in the UK but nowhere near the same as it did in the US. We are suffering a gradual squeeze here but in the US they saw a sharp rise, which left many people with no way of paying back their mortgage.”


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