Subprime fallout cutting wide swath with huge impact to mortgage

Colorado Springs Business Journal, Jul 27, 2007 by Sarah Colwell

The fallout from subprime mortgage loans, those made to people with below prime credit scores, is making things more difficult for mortgage brokers and consumers alike.

Delinquency rates for subprime adjustable rate mortgages, which accounted for about 9 percent of all outstanding first lien mortgages, have continued to climb nationwide. During the first five months of 2007, subprime mortgage delinquencies rose to more than 12 percent, which is a six-year high, according to the biannual Federal Reserve monetary policy report to Congress. According to some estimates, losses associated with subprime mortgages could total between $50 billion and $100 billion, said Ben Bernanke, Federal Reserve chairman.

During the last year, dozens of national subprime mortgage brokers and lenders have gone out of business. Locally, the subprime fallout also has caused many mortgage brokers to go out of business, said Bob Watson, a loan processor at American Finance Inc.

"There has been huge impact to mortgage brokers in Colorado Springs. All you have to do is look at a phone book from a few years ago and look at one today," Watson said. "There is about a third the number of brokers now than there used to be three or four years ago."

As the fallout from these loans creates financial hardships for consumers and financial institutions, federal regulators are looking more closely at mortgage lending and are tightening the standards for all.

Credit has become less available in the subprime mortgage market as investors in subprime mortgage-backed securities look more carefully at subprime loans and lenders have tightened underwriting standards, according to the Fed report. For example, more than half of the lenders questioned during an April survey by the Federal Reserve said they have tightened credit standards on such loans during the past three months.

"I have a client who I closed six months ago and there is no way he would be able to qualify today. It just gets uglier and uglier," Watson said. "(Qualifying for a loan) is like being in a dentist's chair now; it's just like pulling teeth. You can still get it done, but you feel like you've been through the wringer. Everybody is just realizing just how much more challenging it is to get a mortgage now."

Fewer options

Other lenders are removing some nontraditional lending products from their portfolio all together.

Last week, Wells Fargo's mortgage business line stopped offering a one-year adjustable rate mortgage, the 2/28 ARM and the 40/30 two- year ARM through its third-party subprime lending. It also discontinued the one-year ARM, the 2/28 ARM and the 40/30 2/6 LIBOR ARM through its retail business lending.

"These changes (were) made to align our practices with industry guidance, as well as appropriately respond to recent downgrades by key ratings agencies regarding subprime bonds," said Kevin Waetke, assistant vice president with Wells Fargo's Home & Consumer Finance Group.

Declining business

This combination of increased rates and decreased products has caused business to decline for several local brokers.

"It's a big challenge now for all the small brokers to stay afloat in this tougher market, where less people make deals now and there are less loans out there," said Dan Bathje, owner and mortgage specialist at StrongTower Mortgage. "For all the brokers right now, it's not as much business as it was a year ago or three years ago. There are less of us now, but we're all fighting for a smaller pie."

Loan officers with American Finance Inc. have seen a decline in the number of deals coming their way.

"Absolutely it has affected our business. You can tell in our pipeline. We use to have 10, 12, 14 clients in the pipeline for our two loan officers," Watson said. "Now each loan officer only has about two in the pipeline and has had a couple of deals fall out, and our fallout rate has increased. It stings more today for our business than it has in the past."

Micha Mohr, owner of Encompas Realty Group mortgage division, said business has declined because consumers are afraid.

"The amount of people coming through the door has decreased, mostly because they are scared they won't qualify and they don't want to be told no," Mohr said. "If they have a ding on their credit they are afraid to ask anymore -. That whole train that was working beautifully for five or six years has stalled."

Consumer jitters

Consumers also might be deterred from purchasing a home because interest rates have risen. However, they are still near historic lows. (See chart)

Another reason consumers are shying away from home mortgages in Colorado Springs is because they are unsure they will be able to sell their homes in three years, especially those in the military who move frequently, Mohr said.

The housing market has slumped in Colorado Springs, El Paso County and throughout the nation. Variable and adjustable rate mortgages are causing many people's monthly mortgage payments to increase by hundreds of dollars. Unable to pay, may of these homeowners face foreclosure.