Foreclosure fallout

By ALAN ZIBEL
AP Business Writer

WASHINGTON (AP)— A surge in home foreclosures in the coming years will cause U.S. property values to sink by $223 billion, a new report says.

The report released Tuesday by the Durham, N.C.-based Center for Responsible Lending estimates that 44.5 million households will see their property values drop by $5,000 on average as mortgages sold in 2005 and 2006 to borrowers with weak credit reset at higher levels.

The center said declining property values and shrinking tax revenues would be fall hardest on communities
with lots of minority residents, who received a disproportionate share of such loans. The 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.

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.