HOUSING: Banks haven't wiped out all risky loans
Low or no down payment mortgages still available
By ZACH FOX - Staff Writer | ∞
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 county's historic foreclosure problem.
In some cases, loans issued as recently as June already exceed the market value of the home, according to county records.
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, 21 percent of all new mortgages in San Diego County, or about 6,400 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, housing prices have fallen 23 percent, according to Standard & Poor's Case-Shiller Home Price Index.
Drowning right away
Further, some of those loans 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 low 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 12 percent or less down payments, 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. Low down-payment mortgages on properties that were almost immediately below market value stretch beyond the cluster of condos in Escondido.
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 North 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 (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business.
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Frank wrote on Sep 13, 2008 7:03 PM:Wow – some crazy stuff going on right now. Our economy is falling apart as we speak. We have banks failing on what feels like a daily basis, and there does not appear to be an end in sight. All the while, the US government is bailing out many of the banks that are deemed “too large to fail.” While the government prints more money, the dollar is becoming less valuable. I will not even mention energy. Let’s not forget that the unemployment rate is now above 6% and the Dow is down 14% on the year.
Yeah, people took out some bad loans, lied and made bad decisions, but 10 years ago they would not have been allowed to make those decisions. Clearly, an unregulated mortgage industry is a bad idea and speculators always ruin everything for the “common people.”
Right now, we are at the end of the beginning. In other words, we are in for a long, deep recession.
America wrote on Sep 13, 2008 7:18 PM:Don't worry the Federal Govenment will bail out and pay everybodies bills. Dont ask how just believe. Click your heels together three times and charge on your Visa.
JSten wrote on Sep 13, 2008 8:25 PM:SHEESH!
Who would have guessed it?
Lending institutions writing risky loans?
You would think the regulatory system would have some controls in place to cover such things.
Lyle wrote on Sep 13, 2008 9:52 PM:Zach one of the things we are currently seeing is the HUGE resurgence of FHA loans. With the FHA current high loan limit of just under $700k, FHA is the only game in town for most buyers and lenders. Now FHA still allows for a low down payment of as little as 3%. Because there are few if any places to sell off loans most conventional loans have gone bye, bye.
We face a dilemma coming at the first of the year though. FHA loans in our area will be based on 115% of our median home price. When that goes into effect we could very well see maximum FHA loans limited to around $450k. No one seems to be addressing this issue in the news Zack.
This will certainly place a squeeze on an already tight market for homes in our area. Especially those priced over $450k.
Melvin wrote on Sep 14, 2008 8:03 AM:If people were going to walk away just because they were upside down in their property, the entire state of California would be a ghost town right now. People who put 30% down in 2003 and haven't refinanced are upside down.
Nothing Wrong with Risk wrote on Sep 14, 2008 10:54 AM:There's nothing wrong with risky loans, as long as the return makes up for the risk. No one will take that type of risk for a 5% or 6% return when they can do almost that well with a CD. But they would for maybe 10%. Write the loan at an interest rate that balances the risk of the bank (or whoever ends up with the loan) and there won't be a problem. That is, if you do a little due diligence to make sure the borrower has the cash to make the payment.
What was so screwed up was not the risk of the loan, but the risk at a low rate (initially) + borrowers (with the help of their brokers) lying about their income + lenders not checking to see if the borrowers (i.e.brokers) were lying + LTV's that would in no way collateralize the loan.
I worked in hard money for a few years, and we made risky loans. But, we didn't just do them at 6% for someone that was making $8 an hour at 100% LTV. We couldn't, because no private investor in their right mind would fund the loan.
Too many people had their hand in the cookie jar, making major bucks all along the way, without the actual loan making anyone a dime.
Thanks wrote on Sep 14, 2008 11:10 AM:Zach Fox does some of the better pieces in the U.S. on mortgage problems in MHO. Thanks.
Many Dirty Hands wrote on Sep 14, 2008 11:16 AM:There may have been and still is, lots of fraud: purchaser, seller, RE broker, mortgage broker, mortgage bundler/reseller, rating agencies, and many more. Greed is a powerful motivator. Watch what happens with Lehman this weekend and perhaps WaMu next week for a better idea of where we are headed.
MJ wrote on Sep 14, 2008 1:26 PM:This situation is sort of like a virus -- in order for us to get better, and perhaps gain some immunity, it needs to run its course. The problem is that we are trying to blend a socialist and capitalist approach to the economy and it does not work -- never has. In capitalism, companies that make bad bets or are not managed well tend to fail and disappear, to be replaced with others who (ideally) learn from the mistakes of the past. With that said, I'd make darn sure I did not have over 100K at Wamu!
Only half way there wrote on Sep 14, 2008 7:13 PM:This is not just the real estate market. It is the whole economy. We have had deregulation in many areas and all have been failures when that happens. There needs to be rules and regulations to hold the white collar opportunists back. Real estate is half way to where it is going to end up. I think that the root cause is gas prices. Money that was destined for house payments, now goes to fuel costs and food costs indirectly raised by fuel prices. However, our REPUBLICANS and DEMOCRATS both refuse to address the issue because they are all rich from those companies at our expense. Oil/fuel production needs to be nationalized to stabilize the economy. Our real estate market and economy has beend devastated by graft and greed.
local osider wrote on Sep 15, 2008 7:19 AM:I think its interesting that the consequence of a republican dominated congress and presidency is that we have to become a socialist country to offset the damage done by a completely free marktet economy. We now have to bail out every mega bank out there which is absolutely NOT a free market principle. And then you have Greg in Oceanside cheering on the process every step of the way..Still we have people voting for a candidate that we KNOW will continue the same policies as he has TOLD US that he doesnt understand the economny...His advisors will be the same as Bush's.. Face it folks...whether we like it or not we are turning to socialism principles to ensure our country does not go under....For evey action there is a reaction...What do you think about this McCain supporters...are you comforatable with socialism?
Dear SenMcCain wrote on Sep 15, 2008 8:01 AM:Are we in a recession yet?...
...how about now?...
...and now?...
...what about now?...
...
Wait wrote on Sep 15, 2008 10:03 AM:before you close those loans, I want to make one. I make $16,000.00 per year and I want a house in RSF at low interest ok? If you can stop by my apartment in east escondido, I can sign those loan docs for you.
Raoul wrote on Sep 15, 2008 10:31 AM:There are several things that everyone should know about how we got here and possibly where we're going. Two good places to start are "The Giant Pool of Money" from NPR's This American Life and "Prudent reform needed for Fannie, Freddie" from David Reiss (A quick Google search should yeild both peices). Reiss points out in his article that what we have now in these bank/lending bailouts is "the privatization of profits and the socialization of losses". This is an inescapable reality for anyone who has truly studied our economy. It's NOT capatilism it's socialism for the wealthy.
I am owing wrote on Sep 15, 2008 1:14 PM:IRS at least $350,000.00, I assume it is ok if you write it off, and we can start fresh! I am sure the tax payers don't mind helping me out! :)
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