Federal regulators are currently reviewing national home loan policies in attempt to limit risks to both the borrower and the lending institution in the aftermath of the national “mortgage meltdown.” The policies of several major U.S. lenders–including New Century Financial Corporation and Fremont General Corporation—are being reviewed to determine whether impropriety was used in their business practices.
New Century Financial Corporation was the second-largest U.S. subprime-mortgage lender, having written $33.9 billion in mortgages in 2006 and specializing in lending to individuals with weak, or subprime, credit.
Fremont failed to make proper allowances for its “large volume of poor quality loans,” and operated with inadequate capital. Fannie Mae recently said it would stop buying loans involving borrowers with poor credit. Meanwhile, People’s Choice Home Loan, Inc. joined more than twenty other sub-prime lending companies in filing for bankruptcy
We asked the following questions:
1) In light of the nationwide mortgage meltdown that saw subprime lending companies collapse and mortgages deflauted in many areas of the country, what effect will this issue have on the Central Oregon housing market?
2) We’ve seen rising mortgage delinquencies as the consequence of the subprime shakeout throughout the country. What effect will this have on first-time buyers trying to qualify for a home loan?
3) Have Central Oregon banks experienced a “Flight to Qualify” for home loans in the aftermath of the mortgage meltdown?
4) What effect will credit defaulted swaps between some loan institutions have on pension funds, PERS and other equity sharing funds in the aftermath of the subprime collapse?
And received the following responses:
Frank Wheeler , executive vice president, mortgage center manager, Bank of the Cascades
1) The so-called mortgage meltdown will have a limited, if any effect on the Central Oregon housing market. Statistical data shows that there was only a very small concentration of subprime lender customers in this area with most of the loans concentrated in the East and Southwest, particularly in California. Borrowers from other areas will continue to move here, many having established long-time equity in their homes and then bringing their equity to this area.
2) First-time buyers in Central Oregon will find that we didn’t tighten up standards or qualifications for a home loan en lieu of the subprime lending collapse. We kept the same standards for potential homebuyers and first-time buyers will find attractive rates, including special Fannie Mae loans for new homeowners.
3) We haven’t seen a “flight to qualify” but have actually seen prices moderate in Central Oregon with homes that speculators and investors purchased over the past two years coming back on the market at more affordable prices. We’re seeing homes in Redmond and outlying areas affordably priced under $200,000 which a year ago wasn’t there. Delinquency rates in Central Oregon are averaging .25 percent while nationally the average is 4.95 percent so the purchasing cycle for housing in this market is very strong.
4) Credit swaps, or an investor creating a security and swapping it to another company, is not an issue in this market. You’ll find that the majority of the banks in Central Oregon do not get involved in credit swaps.
Larry Snyder , president & CEO, High Desert Bank
1) While I don’t have any statistics that detail how many loans in Central Oregon originated at a subprime lending institution, I don’t think there are a lot of these loans in Deschutes County. I imagine there are some in Bend, Redmond and LaPine, but for the most part, I don’t think this issue will have a big impact on the Central Oregon housing market.
2) The collapse may effect some first-time homebuyers, but what scares me more is the interest-only loans that borrowers are obtaining that are 100 percent financed with the homebuyer putting nothing into it that is geared toward investors who are “f“ipping” homes and first-time buyers. I feel the banking industry is doing a better job in this area qualifying buyers and we’re seeing a lot of buyers with large amounts of equity coming into this market.
3) I feel there is going to be a tightening that will sweep nationwide in the aftermath of the subprime collapse. It was to the point three years ago where it was almost as easy getting a home loan as it was getting a car loan, or in some instances, easier. It was crazy.
4) We live in what is still essentially a small market so swaps are not an issue here. Maybe in Portland or larger metropolitan areas, but not here in Bend.
Dave Botieff, branch manager, Wells Fargo Home Mortgage, Clackamas
1) The effect to the Central Oregon housing market might very well be minimal. With the recent plans of the Government Servicing Entities (FNMA and FHLMC – Freddie Mac) to form subprime loan “bailout” programs, there is an increased focus in keeping subprime customers in their homes. Wells Fargo has had a long-standing commitment to working with our customers who, due to varying circumstances, are having difficulty in meeting their payment obligations. Some of the tools that we can use are loan modifications and temporary payment reductions. Our goal is to keep customers in their homes. We’ve also recently launched our national Steps to Success Program, a one-of-a-kind financial management program that is set up to help our nonprime customers get back on track financially and improve their credit rating.
2) Wells Fargo has always offered specialty loan products designed to assist the first time home buyer qualify for and purchase their first home. These include participation in bond programs, down payment assistance programs and government loans, such as FHA and VA loans. With an emphasis on these tried and true mortgage products that contain features that enable customers to safely afford their payments, we actually expect to see an increase in first time buyers.
Kyle Frick, vice president, marketing and sales, Mid Oregon Credit Union
1) We have had a slowdown in lending verses our very strong performance of 2006. We know that many people have leveraged the equity in their homes due to the above average appreciation of the last few years. As we analyze the trends going forward, we hear from economists that values for homes in Central Oregon will continue to increase, only at a slower pace in line with historical appreciation levels.
2) We are qualifying first time buyers right now. With home inventory levels higher and pricing moderation, many people who were not in the market because of prices and availability are starting to pre-qualify for home loans and make offers. There are still many people out there with credit worthy of purchasing a home.
3) We provide information to our members to help them with their home buying decisions. Our mortgage business is ahead of our performance in 2006 and we hope to continue helping our members with loans and information.
4) We are focused on helping our members with home loans and developing relationships with our providers to insure consistent and viable mortgage products. Since we do not portfolio a substantial amount of real estate loans, we are certainly in a good position financially. The majority of mortgages we originate with our members are conforming 15 and 30 year fixed rate loans.
Robin Freeman, President & CEO, Community First Bank
1) Sub-prime lending traditionally addresses the lending needs of customers who have deficiencies in areas of debt coverage, credit, income documentation, or non traditional properties. Activity in the Central Oregon market has been weighted to higher-priced, traditional properties for buyers with higher incomes, including retiree/second home buyers. Therefore sub-prime lending has not been as predominate as certain other markets. Delinquency levels locally are not as high as compared those other markets, and we do not expect a significant impact on the local market.
2) First time home buyers are generally faced with challenges related to limited credit history and lack of down payment, and several programs that are not “sub prime” are available. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have evolved with products to meet the needs of first time homebuyers. In addition other programs are available through FHA, VA, State Bond, USDA, and Down Payment Assistance programs available to assist buyers challenged in these areas.
So, more and more in recent years the gap that sub-prime lending filled has narrowed, borrowers and lenders will shift to and rely more heavily upon the FHA, VA, USDA, Down Payment Assistance, and flexible Fannie/Freddie products. This will limit the effect of the meltdown on the Central Oregon Housing Market.
3) Construction lending to residential builders has slowed, but more due to an inventory building up. As noted previously, the level of sub-prime lending was not significant and therefore we have not experienced a “flight to quality.”
Mat Clifford, private banker, Sterling Savings Bank
1. The Central Oregon housing market is considerably more solid than in other parts of the country. The work force is stable with home prices dropping slightly. The buyers today are purchasing to occupy and, for the most part, are qualified to purchase a home in their price range. Many investors, especially the first timers, bought into the housing equity surge with the sub prime mortgages. It is these mortgage holders now that are showing price reductions on homes listed for sale. This is keeping Central Oregon active in sales with more listings under $350,000 than for some time and a lot more under $300,000. This has been great for Central Oregon giving many more residents belief that an affordable home is possible.
2. First time buyers may suffer the fall out results of the sub prime mortgage market. Lenders are tightening a bit in relationship to the percentage of sub prime lending they do. Appraisers too are now being warned that they may have gone overboard with the raising of values and lender assistance they may have given for buyers to purchase. This has helped Central Oregon first time buyers as well. New subdivisions with lower pricing have popped up….passing a message to developers that there is definitely a need for lower priced housing. First time buyers may end up in a better position than at first thought as good loans will out weigh the risks for the marginal. Eventually there will be a softening of the A minus market which will allow the alternative buyers back into the housing market.
3. The sub prime mortgage market hasn’t developed a “Flight to Qualify” lending market as yet. The influx of sub prime loans begins to expire this year on three year recasts. This fall should show signs of this flight moving forward for the next two or three years. Many Central Oregon investors were qualified and have the capability to sustain increased payments. Marginal buying done in very expensive markets i.e. San Diego is where this flight will be felt the earliest and hardest.
4. Sure pension funds, equity funds and others that invested heavily in the mortgage market may suffer a down turn. Banks and lending institutions are smart, considering the default of the S & L’s in the ‘80s. Fees and rates will eventually go up to recoup losses. An optimistic outlook would be better suited for the situation. The turn may only be temporary as other creative mortgage financing will come along and make it easier for refinancing. Sub prime lending hasn’t been around for that long so reality says that it may only be a short lived down turn.