HOUSING: Banks haven't wiped out all risky loans

Low or no money down mortgages still available

By ZACH FOX - Staff Writer | Saturday, September 13, 2008 6:09 PM PDT ∞

As housing prices plummet and foreclosures dominate the real-estate market, major banks across the nation have continued to issue loans some analysts consider risky.

Lenders continue to make mortgages that require little or no down payments in areas where housing prices have fallen as much as 3 percent each month.

Meanwhile, some analysts have identified exotic loans as one of the culprits behind the region's foreclosure problem.

In some cases, loans issued as recently as June already exceed the market value of the home.

Whether a mortgage with a small or zero down payment in a rapidly depreciating market is inherently risky is cause for debate among analysts.

Some point to studies, such as one by the Federal Reserve Bank of Boston, that suggest price decline is a more accurate indicator of foreclosure than a loan with high interest rates. Also, they say, if a borrower owes more than the home is worth, the homeowner is more willing to enter foreclosure.

Collateral v. Borrower

If many homeowners adopt that philosophy, one of the entities in biggest trouble would be the Federal Housing Administration, a government agency that insures loans for first-time home buyers with a down payment of just 3 percent.

"You could literally be under water for most of the FHA loans made since January," said Bruce Norris, a real estate investment adviser based in Riverside who covers Southern California. "In Riverside County, you could be 30 percent under water from January. And I think those could turn into a pile of foreclosures."

However, other analysts said the quality of the borrower, not the value of the house, matters most.

Mortgage brokers, real estate agents and lenders said underwriting guidelines have tightened, meaning many of the dicey loans, such as applications that required no proof of income, made during the real estate boom of three years ago have been eliminated.

"Banks still have to lend money to stay in business," said Shawn Harris, a mortgage broker based in Oceanside. "They're just betting that people are not going to walk away."

Over the last year, 30 percent of all new mortgages in Riverside and San Bernardino counties, or about 16,000 loans, carried a down payment of 10 percent or less, according to data from First American CoreLogic and DataQuick Information Systems, two real estate research firms.

During that time, the median price in Riverside County has fallen 35 percent, according to DataQuick.

Drowning right away

Further, some loans in the region were made on properties that real-estate agents said were overvalued at the time of purchase. In south Escondido, prices at one condominium complex increased by 31 percent while the median price in the area tumbled by 54 percent.

Units at Brookhaven Condominiums at the corner of 15th Avenue and Escondido Boulevard were the only condos to sell in 2008 for more than $300 per square foot. The average price in the area was $141 per square foot, according to Sandicor, a local real estate listing and sales database.

Not only did the condos sell at double the price of comparable units, but banks also approved loans that carried very little down payments.

For one unit, Washington Mutual approved a no-money-down mortgage in December 2007 at the price. Seven months later, a notice of default, the first step in the foreclosure process, was filed on the condo, according to county records.

Washington Mutual declined to comment, citing privacy concerns. The nation's largest savings and loan institution, Washington Mutual's shares have plunged 92 percent over the last year over concerns that it might not survive multibillion dollar writedowns on its mortgage portfolio.

In total, 12 units sold at prices that baffled real estate agents. All carried loans with down payments of 12 percent or less, according to county records.

Four mortgages carried down payments of 5 percent or less.

"The prices are not at market value, they're just not," said Troy Sauvageau, a real estate agent in Escondido.

Potentially widespread problem

But the Brookhaven condos were not the only recent house sales to carry mortgages with low down payments.

For example, Flagstar Bank, a Michigan-based lender, originated a 5 percent down payment loan on an Oceanside home in the 92057 ZIP code, an area in northeast Oceanside that has led northern San Diego County in foreclosure filings and seen some homes lose as much as 50 percent in value.

The home sold for $162,000 and carried a loan of $153,900. Just one week later, a similar-sized home down the street sold for $140,000.

Flagstar Bank declined to comment, citing privacy concerns.

It isn't just banks. The Veterans Administration has guaranteed several loans with no money down in the middle of Oceanside's foreclosure cluster.

Also, the Federal Housing Administration continues to insure loans with very little down payment. But mortgage brokers and economists said the government agencies will avoid high foreclosure rates because of tight income guidelines.

Analysts said banks are making a bet that home values won't drop much more, and if they do, qualified borrowers will not be willing to wreck their credit scores for a cheaper home.

But critics said foreclosure becomes attractive, even economically sensible, when the homeowners start to see six-digit losses.

However, mortgages on apparently overpriced condos such as the ones made at Brookhaven raise larger issues, said Paul Leonard, director of the California office of the Center for Responsible lending.

"It does raise serious questions about whether the banks are doing a good job of establishing good, strong collateral under the loans," he said. "You would think that after the huge market meltdown that banks and lenders would be paying a whole lot more attention to make sure they're appropriately pricing that collateral."

Contact staff writer Zach Fox at (951) 676-4315, Ext. 5412, or zfox@californian.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business