Living most of my life in Florida, cockroaches were a fact of life. In general, if you spotted one cockroach, that meant there were at least 1,000 others somewhere, waiting in the wings.
In the past few months homeowner subprime sob stories have been coming at us from all over the country, ad nauseam. With Washington state in the top five for toxic loans, you’d figure we’d see more local stories.
Here’s one from the Seattle Times this morning: Borrower, beware: Debt disaster looms as rates rise on easy-money mortgages
It was a sweet little house, with affordable day care nearby for their 6-year-old son. Patrick Fultz and Laurel Swartz were hooked.
But when the couple — with no savings and about $20,000 in credit-card debt — shopped for a mortgage to buy their 1,200-square-foot house in Tukwila last year, they heard the same thing from lenders and in a home-buying class they attended: Forget it.
“You basically had to be Scot free, no massive credit debt, which we had, and to have money in the bank, which we didn’t,” said Swartz, 31. “How do people buy houses in America anymore?”
Fultz thought he had found just what he was looking for when he came across Gold Mortgage Lending in Renton on the Internet. “No income verification mortgage, zero down,” read the firm’s Web site. “We fund mortgages the others can’t.”
Erin Rearden, a mortgage counselor at Solid Ground, a nonprofit social-service agency in Seattle, said the deal Fultz and Swartz struck is typical, especially as the cost of housing skyrockets out of reach for so many.
“They wanted a home. And a lot of this comes from operating under the assumption that owning a home is an inherent American right. So when someone offers a way to do it, you want to go for it,” she said.
Fultz makes $12.75 a hour driving a fish-food delivery truck. He recently paid off half of the 12 credit cards he used in buying a motorcycle, a couch and a television, going out to eat, “just buying stuff,” Swartz was working at an insurance office, where she made $11.75 an hour.
The couple signed two mortgages to buy their $246,800 house in July. The first loan, a so-called pick-a-payment loan for 80 percent of the deal, had a variable interest rate. The second mortgage, at 12.5 percent interest, covered the rest.
Not long after they signed the loan, Swartz decided to dump her sedentary office job to become a personal fitness trainer. The new job paid less, $7.89 an hour, but she had the opportunity to earn commissions as she brought in clients.
The commissions, however, didn’t materialize. At the same time, the interest rate on the first mortgage went up, from 7.06 to 8.15 percent — and it can go up every month until topping out at 11.5 percent.
Suddenly the couple were $300 a month short of paying their bills.
“I feel sorry for anyone who can’t get into a house,” Mills said. “We beg the banks to give us their turn downs. I help people; that’s the bottom line.”
Editors note: Always watch your back when a commissioned salesperson beings a sentence with “I help”
But today, people like Fultz and Swartz aren’t the only ones having money problems. Mills, and brokers like her, have troubles of their own.
A meltdown in the subprime lending market is drying up the money pipeline.
Across the country, where home values are stalled or plummeting, lenders are watching loans turn upside down, with mortgages grown larger than property values. People behind in payments are losing their homes. Entire neighborhoods in parts of the Midwest and California are shuttered by bad debt.
The situation is nothing like that in Seattle, where increasing home values can still grease the mechanics of subprime deals.
But even here, lenders have stopped serving subprime clients or are imposing tighter requirements to qualify, from higher credit scores to a couple of months’ worth of payments in the bank and at least some money down.
“For my clients, that is a deal killer,” Mills said. “My clients don’t have any money.”
Wait a minute… I’m confused. I thought your customers were people that already didn’t have any money? Or were you talking about the money to pay your broker fees?
The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.
“I didn’t make my own mortgage payment this month,” Mills said in April. “But nobody feels sorry for me.”
While the map of misery shows a percentage of toxic loans of roughly 15%, I wonder how many of these loans were written in just the last year or so?
Where will future “buyers” get the money for even a 5% down payment. If there are less buyers, what will that do for Seattle home values?
Now that we’ve seen one homedebtor facing foreclosure story here in Seattle, I wonder how many other stories are out there?
(Lynda V. Mapes, Seattle Times, 05-07-2007)
Local mortgage giant Washington Mutual has been in the news quite a bit the last few days. On Tuesday, Seattle Times business reporter Amy Martinez made the (not-so-bold) prediction that WaMu won’t escape subprime turmoil.
During the housing boom of the past several years, Washington Mutual was among the nation’s top lenders in the high-risk sector of subprime mortgages.
Now subprime loans industrywide are failing at an alarming rate.
Although the Seattle-based thrift has cut back its subprime lending, it still has a lot of the loans on its books.
Exactly how vulnerable it remains will become clearer today when WaMu holds its annual shareholders meeting and releases first-quarter financial results.
The high-credit-risk market known as “subprime” represented 9 percent of WaMu’s overall loan portfolio at the end of 2006. Analysts who follow the company predict first-quarter profit will suffer as a result.
Un-shockingly, she was proven absolutely correct later that day when WaMu’s first quarter results were released:
Washington Mutual Inc. said Tuesday its first-quarter profits slid 20 percent amid a nationwide implosion of the subprime home loan market.
…
Kerry Killinger, Washington Mutual’s chairman and chief executive, said the company’s retail banking, card services and commercial groups fared well, while the home loan market - particularly the subprime segment for consumers with high-risk credit histories - remained a serious challenge.
Washington Mutual’s home loans group posted a first-quarter loss of $113 million compared to a $52 million profit during the year-ago period. The company suffered a quarterly loss of $164 million on sales of subprime mortgages, alone.
To limit further damage as the housing slump continues, Washington Mutual said it had scaled back its subprime portfolio and had set aside more money to cover future loan losses: $234 million for the quarter compared to $82 million in first quarter 2006.
“Over the past 12 months, we have taken a number of prudent actions to reduce our exposure to the subprime mortgage industry,” Killinger said in a statement. “These actions, along with a diversified business mix, limited our exposure to the mortgage market’s downturn and position us well to expand and grow as market conditions improve.”
Among those “prudent actions” is an open offer to refinance some of their riskiest loans into more traditional products at discounted rates:
Washington Mutual Inc. said Wednesday it will refinance up to $2 billion in subprime mortgages to help borrowers avoid default and foreclosure.
The program will allow subprime borrowers who remain current on their existing loans and are bracing for payment increases to apply for discounted fixed-rate loans or other refinancing options.
“Stepping up and helping our customers stay in their homes is in the best interest of our borrowers, our communities and WaMu,” Kerry Killinger, chairman and chief executive of the Seattle-based savings and loan, said in a statement.
Will measures like these be enough to keep WaMu from experiencing serious financial pain as the consequences of yesterday’s loose lending begin to pile up? Only time will tell, but at least WaMu has one important thing going for it: headquartered in the specialest place on earth!
(Amy Martinez, Seattle Times, 04.17.2007)
(Bill Virgin, Seattle P-I, 04.17.2007)
(Associated Press, KOMO TV, 04.17.2007)
(Associated Press, Seattle P-I, 04.18.2007)
(Bloomberg News, Seattle P-I, 04.18.2007)
A pair of maps containing interesting statistics surfaced in the past few weeks that are worth sharing here. First is the “Map of Misery” from BusinessWeek, showing “the percentage of new and refinanced mortgages into loans with payment options.” This is important to note, because as BusinessWeek explains:
The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
Click to enlarge
As you can see, the Seattle area is right up at the top, with only portions of California, Nevada, and Florida having a larger percentage of option ARM loans. Note that this only includes option ARM, and does not include interest-only loans or other ARM products. Who knows how high that number would be if it did.
The second map comes courtesy of the Detroit Free Press, and shows the difference in inflation-adjusted median household income from 1999 to 2005. (Correction: The Detroit Free Press used inappropriate statistical methods, leading to incorrect values on the original map. The below map is a corrected version generated by yours truly. See this post for details.)
Click to enlarge
So, during a time when wages have decreased 7.0%, home prices have doubled, defying all logic. How is this possible? Sure, low interest rates were a factor, but they only dropped about two points from 1999 to 2003. That does not explain 100% home price appreciation. No, the primary culprit is certainly the ready availability of adjustable-rate mortgages, including a large number of option ARMs. Too many people have been swept up in home ownership psychosis, and have been all-too-willing to jump head-first into dangerous financing.
And yet there are still those that insist that our housing market is 100% healthy.
(Cover Story, Business Week, 09.01.2006)
(John W. Fleming, Detroit Free Press, 08.30.2006)
