I’m weary of hearing that the sub-prime market is or was a small portion of the pie in the Puget Sound Region. Certainly, there are many prime conventional loans that were made. But the idea that the originations of sub-prime loans being reduced or eliminated will have a less than meaningful impact is just not reality.
Is Legacy Escrow Service, Inc. the only escrow company in the area that closed a lopsided amount of home loans and refinances that were sub-prime vs. traditional conventional transactions? Was Legacy Escrow Service, Inc. the only company working with loan officers in the sub-prime arena? Hardly. We are a small fry compared to the volume of more established companies and title insurers.
As I mentioned over at RCG, how can I explain away the fact that our refinance volume is down about 70% YOY and that is not due to working with only two loan officers. We worked with scores of LO’s, as any escrow firm does. It means that with the sub-prime market essentially relegated to the “intensive care unit” due to Wall Street liquidity problems and the severe delinquency rates reported, the loan officers that sent work our way are doing significantly less originations. And that “Domino” has squarely hit escrow and ancillary real estate service providers in the rear end.
Seventy one percent of the purchase transactions closed by our office in 2005 alone was 100% financed (largely 80/20 with pre-payment penalties, etc..) and while the number dropped as 2006 went forward we did not see a healthy decline in 100% nothing down purchase transaction until 4th Quarter of 2006. Don’t forget that in EVERY single 100% nothing down transaction our office closed, the purchase price was increased to offset closing costs paid by the seller on behalf of the buyer due to their loan program. And to really make you super dizzy, a few of those were increased AFTER being involved in multiple offer situations. The 100% loan programs played a very central role in housing price escalation. And they will play a central role in making many of these homeowners renters again—-but that is just one fellow’s opinion.
Regarding the sub-prime loans in the region, Jillayne Schlicke remarked in a recent comment:
That’s because Eliz Rhodes was looking at only Seattle and the Eastside.
I have always said that the entire Puget Sound area has been populated with upwards of 8 to 9,000 loan originators whose sole income was only originating subprime: Starting from Pierce, up through King and Snohomish, if you add all three counties in together, there has to way more subprime loans that what she originally stated several months ago.
These folks never learned how to originate prime, conforming, A paper conventional loans and never wanted to learn because they could make so much more money shafting people into a subprime loan due to the high yields being offered by investors.
The cool map is only for the year 2005. Would love to know their data source. My guess is that it came from Firstam/CoreLogic
Jillayne’s comment inspired this post. But the question remains: If our small business was doing a large volume of closings with sub-prime terms, how many did First American, Chicago Title, Pacific Northwest Title, Old Republic, The Talon Group, TransAmercia/Land Title, Fidelity Title, Stewart Title and all the other escrow firms close? I suppose the market will tell us.
The good news is that to an extent, Seattle is certainly not experiencing the problems I witnessed in New England a week or so ago.
“It was an idiotic decision to buy in Massachusetts. I should have bought in Seattle.”- my brother as he was taking me to the airport.
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18 responses so far ↓
1
Rhonda Porter
// Aug 29, 2007 at 8:59 pm
S-Crow, how are you defining your “subprime” closings? Is it all zero down loans? Do they have to be a 2/28 or 3/36 product with a prepay? Or with a certain lender like New Century?
2
S-Crow
// Aug 29, 2007 at 9:25 pm
Hi Rhonda,
Probably similar to the way you do. It’s all across the board. It’’s fairly easy to pick out. Certainly, some lenders (Long Beach, Home 123, MLN, Ownit, First Franklin, Fremont and so on) but moreso, the terms and even FICO’s if disclosed. Did some of the borrowers need to be sold sub-prime? Enthusiastically no! I commented a while ago about a borrower with strong mid 700’s being placed into a rediculous loan. Nothing I can do or say about it. I also have the duty of filing (ugh) so I have a chance to quickly pull Notes.
Lynlee’s had many more examples than I, but she just shrugs the shoulders and says ” that’s just the way it is, get over it.”
3
Rob Dawg
// Aug 29, 2007 at 10:12 pm
Were there others dealing junk loan products? There is no such thing as one cockroach.
4
femto
// Aug 29, 2007 at 11:38 pm
I’m guessing a lot of what you saw was technically “Alt-A” rather than “Subprime”, with the distinction primarily based on FICO (I’m not sure where the line is drawn). Of course it’s now been demonstrated that loan terms (e.g. 0-down and teaser rates) are more significant than FICO in predicting default, so the distinction might not be particularly meaningful except to semantics nits.
5
Carlislematthew
// Aug 30, 2007 at 6:57 am
Something that’s bothering me lately is this whole talk of the “subprime problem” as if that’s the only place where the problem exists. And when there *is* news that there are problems in Alt-A, the media says that “subprime problems are leaking” as if there wouldn’t have been a problem on it’s own without that pesky “leaky” subprime asshole sitting next to me.
Could it possibly be that the only difference between subprime and Alt-A is that the subprime folks are just more likely to default earlier? Whether because they’re just "chocolatey" at paying bills or have little reserves, etc. I mean, you have a low FICO for a reason: you have a tendency to get credit and then be generally crappy about paying it back.
So, whether it’s subprime or Alt-A that S-Crow is seeing really doesn’t matter a whole lot to me. The ARMS, interest-only, neg-ams, are unaffordable.
6
S-Crow
// Aug 30, 2007 at 7:17 am
Car. Matthew,
Point well taken.
7
Affluent Bitter Renter
// Aug 30, 2007 at 7:46 am
Yeah - I think the distinction is between toxic (or suicide) and non-toxic loans. Simply put, a toxic loan is any loan that the homeowner cannot service for the life of the loan, given the homeowner’s current (and reasonably expected future) income. A toxic loan requires house appreciation, so that the homeowner can refinance out of the loan. If the house doesn’t appreciate, the loan defaults at some point.
8
monzie
// Aug 30, 2007 at 8:37 am
Off topic - My small - modest - condo has four owners who bought since 2002 and all are vigourously obstructing a (hefty) special assessment for much needed repair. As a newcomer to this blog I am wondering if they may have these toxic loans that will force delayed maintenance here and at a number of condos - especially new ones.
9
Jillayne Schlicke
// Aug 30, 2007 at 8:43 am
Let’s also be aware of folks who had a 30 year fixed and a decent credit score, and decided to refi INTO a toxic loan for whatever reason, but usually because they fell for one of those deceptive pieces of direct mail advertising that shows how much lower your payment could be….without explaining that the loan product is a pay option, interest only, negative am ARM.
There are (were?) plenty of mortgage brokerage firms out there all over WA state whose sole business model consisted of direct mail using deceptive marketing, or purchasing leads from mortgage spam, or purchasing leads from banner ad kings such as lowermybills.com. Watch for (and listen on the radio) as deceptive mortgage advertising heats up due to desperation.
There are also some great mortgage brokerage firms with radically different business models based on referral business, education and training in basic lending compliance laws, “best practices” policies, and so forth.
Rob dawg, yes you’re right. Banks also had subprime mortgage divisions carved off and operated separately from their retail operation. Think Countrywide and their now defunct subprime unit, Full Spectrum Lending. Wamu and Long Beach Mortgage, and Wells Fargo which also had a separate subprime unit.
10
Lionel
// Aug 30, 2007 at 8:55 am
Maybe it’s just me, but I don’t think it’s possible to have a massive run-up in real estate prices and NOT have a corresponding increase in junk loan products.
11
Rhonda Porter
// Aug 30, 2007 at 9:00 am
I’m still getting junk mail and if it’s really stinky I forward it to DFI. I post about crappy mortgage junk mail all the time at my blog because I’m always surprised when my clients call me saying, can I really have a 1.25% rate?
12
CCG
// Aug 30, 2007 at 9:48 am
“A toxic loan requires house appreciation, so that the homeowner can refinance out of the loan. If the house doesn’t appreciate, the loan defaults at some point.” I hadn’t heard that so concisely put before. Well done.
13
david losh
// Aug 30, 2007 at 10:02 am
Good Morning!
Interesting that sub prime loans are targeted here. Back in the day I worked with one guy who specialized in sub prime lending.
I’m in the real estate business so I have no money, credit, or income. Scott was my favorite person because even with my financial challenges I could always get a loan. Banks, lenders, and mortgage brokers used to keep to responsible lending practices so when I started getting loans from Wells Fargo and Washington Mutual a very few years ago I was thrilled. It’s also interesting to me that six years ago I was repeatedly turned down for loans at Washington Mutual until three years ago I got two back to back loans from them.
Wells Fargo invited me to a class about Real Estate investing which I took a client to. After the class I talked with a Loan Originator and got a purchase loan with approximately $1200 out of pocket. Yes those purchases have been bought and sold and all I own now is my personal residence. My home is mortgaged to the hilt in sub prime fixed rate loans I look at as a bargain. There again I’m an old time guy who remembers paying 16% interest.
The problem, as I see it, is that there is a discussion about sub prime lending at all. I have gotten loans based on my track record. The investors who make loans to guys like me have been just that, investors. As I used to hear, my deal needed to make sense. In other words investors who lent me money in the past looked at my deal and said to themselves they would not mind owning the property if I defaulted.
It does not translate to me that banks began jumping into a sub prime market they knew nothing about. In addition to the loans I look at the assets they have been lending on. Ticky tacky town houses were proposed as affordable housing. When did a town house thrown up in three weeks become a half a million dollar asset? The price point was intended to be below three hundred thousand or there abouts.
My point is that, yes, sub prime was never intended for mom, dad, and the kids. It’s a high risk lending practice. Over all though it’s a part of this crazy real estate mentality that every body knows what they are doing by reading a book or following the internet.
14
softwarengineer
// Aug 30, 2007 at 11:29 am
NOW, WE HAVE ONE SUBPRIME BORROWER THAT SOLD OUT IN TIME, HOW ABOUT THE ONES THAT CAN’T AFFORD TO SELL OR REFINANCE NOW?
Read the fine print on your jumbo loans, the payments can double or triple real fast. Ohhhhh…..I’ll get me a fixed rate before that happens. Believe me, you won’t be able to refinance until you pay back the interest you owe for year(s) or there’s equity to give the bank for interest debt. What equity now-a-days? Ohhhhh….that’s right, this is the pink pony Seattleland, where 9% evaluation is slamdunk. The only thing slamdunk about real estate evaluation now-a-days is finding a qualified buyer for your over-priced balloon payment house.
Until you do and the escrow is officially signed, its all pipe dreams and pink ponies.
I knew a young gentleman at the gym years ago and he bought a subprime loan house for a year, then couldn’t make the balloon payments, so sold it and went back to renting. His statement to me, “it was nice living in a real house, even for a year, the mortgage insurance payments weren’t too bad and after I was forced to sell, at least I have the memories”. Sounds like a single guy remembering the cute gal that just dumped him.
15
Alan
// Aug 30, 2007 at 12:18 pm
I was an idiot for putting all of my money on black in Vegas last year. I should have put it all on red.
16
chris
// Aug 30, 2007 at 3:35 pm
Back in 2005-2006 I had 4 friends all around the newly married to young family stage that absolutely had to own for whatever reason (usually the female was more adamant about owning). Being somewhat active in financial markets I chimed in my two cents that I’d recommend only pulling the trigger if they ‘had 20% down, or 10% at the very least and a FIXED RATE 30-YEAR MORTGAGE,” not to mention a payment that was still affordable and three-six months expenses saved up, minimum in case of the unexpected. They ALL went with low or no-down ARMS, without exception, so they could “get more house.” All of them are currently very nervous and/or already in trouble (unfortunately). I had even given them hedging strategies like homebuilder/lender put options but they bought so much house (and furniture on credit cards to put in it), that they didn’t have anything left for a 401k let alone a disaster hedging fund. Any financial perturbation at all, and not necessarily something drastic like a job loss, will put them at serious risk of foreclosure. These are not stupid people. We’re talking scientists, engineers and lawyers.
One thing I don’t see about the Seattle Is Special meme is the mentality of using all the financial creativeness available to get ‘the most house’ is substantially similar here as it is in any other market. Massive speculating in LV and Phoenix, that may not be seen as much here, probably accounts for there much more extreme bubble chart but Seattle is no different in terms of the underlying fundamental disease the lenders spread amongst very uninformed buyers. The crux of the housing bubble is the virtual extinction of this type of financing which has only just begun to eliminate buyers in droves. People are not just waking up and realizing how much they are undervaluing their risk with these loan types, they’re just not being offered them anymore.
To think the mentality of using whatever means necessary to get into the most house, with little consequence of future events or a market downturn, was somehow absent in the Seattle market is akin to abject denial.
17
Affluent Bitter Renter
// Sep 1, 2007 at 12:19 pm
Fortune magazine has a map of percentages of subprime mortgages:
http://money.cnn.com/magazines/fortune/storysupplement/subprime_statebystate/
They also colorcode in red counties with a lot of subprime. Outside of California (which is about half dark red), there are only a few dark red counties - including Snohomish, King, Pierce, Thurston, and Mason counties.
What gives? I thought that the local RE establishment assured us that subprime wasn’t a big issue in Puget Sound?
18
S-Crow
// Sep 1, 2007 at 9:11 pm
Yes, and the graphic is based on 2005! I could not find their source but I understand some people have referred to Credit Suisse Bank for sub-prime research. Our area was really rockin in early 2006 all the way through until the winds of change (IMO) started in late summer early fall.
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