Subprime

Stock market down again after more foreign losses

By David Francis, Washington Examiner

March 6, 2007

WASHINGTON - Major U.S. stock markets entered a second week of uncertainty Monday, with more losses in Asian and European markets leading to a seesaw day on Wall Street.

The Dow Jones industrial average was down sharply on its opening, falling more than 70 points in early trading. It recovered in the late morning, just to fall below its opening in the early afternoon.

After a mid-session recovery, prices dipped back into negative territory, closing more than 63 points — 0.53 percent — off Friday’s 12,114 close.

This is the eighth day out of the past nine that the Dow has lost ground.

Losses on the NASDAQ were more severe, with the index dropping more than 27 points to 2,340. The S&P 500 was also off 13 points, closing at 1,347.

Monday’s losses follow a week in which the Dow fell by more than 4 percent, ending an extended bull run that dated back to July.

The recent sell-off has been attributed to a number of factors, including comments made by former Federal Reserve Chairman Alan Greenspan that the United States is headed toward a recession, plus weakness in Asian and currency markets.

The erratic Monday session on Wall Street followed steep losses on foreign exchanges. Japan’s Nikkei index lost 3.3 percent, falling for the fifth day in a row. Indexes in Germany and Britain also were off.

Analysts were split as to when this slide will stop.

“If it’s just a correction, it’s going to take another week to play out,” said Steve Sachs, director of trading at Rydex Investments. “I thought [recent losses were] the beginning of something, not the end of something.”

“The fundamentals of the market are strong, earnings are strong, balance sheets are strong,” said Bill Swanson, a financial adviser at Edward Jones. “I don’t think [the slide] is a sign of weakness in the long term.”

Michael Farr, president of Farr, Miller and Washington, an investment management firm in the District, warned weakness in the subprime mortgage market could hurt some area residents. Subprime mortgages are given to people with poor credit and were popular during the recent housing boom.

Farr said higher mortgage rates are taking more money about of consumer’s pocketbooks, bringing confidence down and forcing more borrowing.

Former Fed Chair Greenspan shows power over world markets

By David Francis, The Examiner

March 6, 2007

WASHINGTON - Last week, Former Federal Reserve Chairman Alan Greenspan’s comment that the United States was headed for a recession sent markets tumbling and Federal Reserve Chairman Ben Bernanke scrambling to assure investors the economy was strong.

It appears as if the maestro is not yet willing to relinquish his baton. Last Monday, Greenspan — known as “maestro” because of his mastery of international and domestic markets — made the bearish comments to investors at a business conference in China. The next day, the Dow Jones industrial average finished down 416 points — or 3.3 percent — at 12,216.24, its worst one day loss since 2001.

This prediction and the sharp Dow losses had Bernanke — who just two weeks ago told lawmakers the economy was strong — back on Capitol Hill to assure that a recession was not on the horizon. On Monday, other federal reserve officials in Washington reiterated Bernanke’s comments, saying growth expectations has not substantively changed. Greenspan backed off his original comments later in the week, saying a recession was possible, not probable. And while analysts believe his original statements were not the only factors in the drop — Asian markets plunged Tuesday morning — they didn’t help investor confidence.

“I think we’ll still need some time to figure out the current market weaknesses,” Farr, Miller and Washington President Michael Farr said. “Greenspan, [stock losses in] China, worries about what’s going on globally, especially in the currency market” all contributed to recent losses.

Subprime mortgages rule housing market

By David Francis, The Examiner

March 8, 2007

WASHINGTON - Approximately 11 percent of all mortgages in the national capital region are subprime mortgages, or loans given to people with poor credit, according to a report from the Urban Institute.

Across the nation, only 3 percent of money lent as mortgages is in the subprime sector. The unusually high percentage of such loans in the area could pose a particular risk as a flattening housing market and rising interest rates make it harder for some homeowners to keep pace with their payments.

The study was based on data from 2004, the most recent data available.

Concerns over defaults on these types of mortgages contributed to Wall Street’s slide over the last week after loan defaults forced dozens of subprime lenders to close their doors.

Homes forced onto the market due to foreclosure could further undermine an already-soft housing market in the D.C. area where inventory is high and houses are staying on the market longer.

Increased foreclosures on subprime loans are also a disincentive for lenders to give mortgages to people with poor credit or little credit history. This might make it particularly difficult to fill new developments, like those in up-and-coming areas such as Petworth or Columbia Heights, which are looking to attract younger people with less financial history.

“These products are making home ownership a possibility for some folks who are unable to obtain a [traditional] mortgage,” said Peter Tatian, a senior research associate at the Urban Institute. He said many minorities in the area, especially blacks and Hispanics, would be unable to buy homes without these instruments.

People need to be educated on other mortgages that do not require subprime interests rates, but are available to people with poor credit to prevent real damage to the housing market, Tatian said.

“It doesn’t have to have a big impact on the market if we can find other ways to get people into loans that are suitable for them,” he said.

Subprime mortgages concentrated in Prince George’s County, Wards 5, 7 and 8 in D.C.

By David Francis, The Examiner

March 8, 2007

WASHINGTON - The largest concentration of subprime mortgages in the region can be found in Prince George’s County in Maryland, where 26 percent of all mortgages are crafted for homeowners with a poor or limited credit history — homeowners who tend to pay a higher interest rate as a result.

In Virginia, Fairfax County had the highest number of these types of mortgages, with 8 percent of homeowners using them to purchase a home. In the District, about 5 percent of all mortgages are subprime, with concentrations of these mortgages in Wards 5, 7 and 8, according to the Urban Institute. The study was based on data from 2004, the most recent data available.

For the national capital region, 11 percent of all mortgages are subprime, said Peter Tatian, senior research associate with the Urban Institute. He said these loans have made housing accessible to people who traditionally have not been able to afford a home.

“It’s becoming a way for someone who doesn’t have a great deal of credit history,” he said. “But it’s more expensive and has higher costs.”

Tatian said he is concerned that minority groups are being targeted by lenders and urged to take out these types of mortgages, despite the risks and high costs that come with them.

“We do find a lot of African-American and Latino borrowers who are more likely to be getting subprime loans,” he said. “It raises concerns that some lenders may be targeting specific groups for these high cost loans.”

Despite problems, area governments are silent on risky home loan issue

By David Francis, The Examiner

March 9, 2007

WASHINGTON - Despite having three times as many subprime mortgages as the national average, and a foreclosure rate among the highest in the country, Virginia, Maryland and the District have few protections against predatory lending.

About 11 percent of all mortgages in the national capital region are given to people with poor credit, compared with about 3 percent nationally. In Prince George’s County, 26 percent of mortgages are subprime.

In addition, according to the nonpartisan Center for Responsible Lending, the D.C. metro region ranks ninth in the country in foreclosure rates for subprime mortgages [see sidebar]. The area has seen dramatic increases in the number of foreclosures in recent years.

New worries about subprime mortgages were raised recently after an increase in foreclosures caused many lenders to go under; failures that played a part in the last week’s stock market slide.

Some lenders, including McLean-based Freddie Mac, have recently announced they will no longer buy subprime mortgages that have a high likelihood of foreclosure. The federal reserve has also warned of the steep risks associated with these types of loans.

Local governments, however, have remained relatively silent. Ward 3 Councilwoman Mary Cheh has introduced legislation providing some protections for homeowners, but the bill is still in the early stages.

“This is a huge topic now with the way the economy is going,” Northern Virginia Association of Realtors spokesman Jill Landsman said. She said some states — Colorado, for example — have created protections for homeowners in danger of foreclosure.

Mortgage lenders oppose any regulation of the market.

“The private market is going to be much better at changing the market to be in line with what investors are expecting,” Mortgage Bankers Association Senior Economist Mike Fratantoni said. “The market can operate better without getting regulatory agencies involved.”

Report: More than 22 percent of area subprime borrowers will face foreclosure

By David Francis, The Examiner

March 9, 2007

WASHINGTON - More than 22 percent of all area homes purchased with a subprime mortgage in 2006 will be forced into foreclosure, according to a report from the Center for Responsible Lending.

This is the ninth highest average in the country, behind communities in California and Nevada and Ocean City, N.J. According to the report, drops in housing prices after a long period of solid growth will lead to a swift increase in the number of owners who are forced to forfeit their homes because they are no longer able to make mortgage payments.

"It's driven by the cooling of the housing market in areas where housing prices were rising rapidly," said Sharon Reuss, a spokeswoman for the group. "Things are just slowing down."

Reuss added that in areas like Prince William County, where subprime mortgages make up more than a quarter of all home loans, a 22 percent foreclosure rate would be disastrous.

"There's a real human cost when foreclosures occur," she said. "It means there are social service issues at play. People are in need of housing and support to continue their lives the best they can. There's a real human cost."

"A lot of people are using their home like an ATM," Reuss added. "Their borrowing against the value of their house" and have trouble making payments.

District mulling shield on looming foreclosures

By David Francis, The Examiner

March 14, 2007

WASHINGTON - The D.C. Council’s consumer affairs and public services committee is scheduled to consider a bill that provides protections for city residents with homes in foreclosure.

“The bill itself focuses on foreclosure rescue scams,” committee counsel Helder Gil said. “There’s a growing number of anecdotal stories about people being scammed out of their home through these things.”

Gil is referring to companies that “equity strip” — the process of offering homeowners who cannot make their payments cash well below the value of the house. These homeowners, facing foreclosure and struggling to make payments, often accept much less than the listed value of the home, which the buyer can then sell for a profit.

D.C. Council Chairman Vincent Gray has introduced the bill, which every City Council member, except Marion Barry of Ward 8, co-sponsored.

The council’s consideration of the bill comes as the number of foreclosures across the country has risen due to increasing interest rates and declining home prices.

Foreclosures have been concentrated in the subprime mortgage market, mortgages given to people with poor credit. An increase in these kinds of foreclosures could hit hard in the District, where about 5 percent of all mortgages are subprime.

These homeowners are concentrated in Wards 5, 7 and 8, areas where a housing collapse could have steep consequences.

The news that New Century Financial Corp. will no longer issue subprime mortgages also complicates the situation.

This could make it more difficult for people looking to purchase a home to get a mortgage, as the company in 2004 originated one-quarter of all subprime mortgages in the District.

In addition, the Mortgage Bankers Association announced Tuesday the late payment rate for mortgages rose to a record-high 4.95 percent at the end of last year, up sharply from the third quarter.

Delinquencies in the fixed subprime market, which rose to 13.3 percent and 14.4 percent for subprime mortgages with adjustable rates, drove the late payment rate.

This news, and slow growth in retails sales sent the market down Tuesday following three straight sessions of gains.

Social welfare concerns in foreclosure debate

By David Francis, The Examiner

March 14, 2007

WASHINGTON - An increase in foreclosures in the District and surrounding jurisdictions could lead to problems beyond a glut of new houses on the market.

A foreclosure on a home brings down the value of property surrounding it. If a number of houses in an area were foreclosed, it depresses the value of the area, making it less attractive to prospective buyers.

This was the case in Houston in the 1980s. Spikes in oil prices led to an economic boom and a sharp rise in home prices.

When the price of oil fell sharply in the mid-1980s, former homeowners left behind ghost towns of foreclosed homes.

The market there didn’t fully recover until the late 1990s, according to a report from the Federal Deposit Insurance Corporation report.

There are also social welfare concerns, including increases in crime and substance abuse in poorer areas, said Helder Gil, committee counsel on the D.C. Council’s consumer affairs and public services committee.

“The majority of these subprimes are in Wards 7 and 8,” he said. “Worst-case scenario, you’re looking at a rash of foreclosures and that aggravates existing neighborhood problems.”

In addition to a bill to protect homeowners facing foreclosure, Gil said the council has considered introducing a bill that provides protection on the front end of the mortgage process.

“It would require lenders to disclose requirements that consumers are getting into,” he said. “There would be a consumer education process [so borrowers] would know exactly how much they’re paying over a period of time.”

Alarming rate of risky mortgages in region

By David Francis, The Examiner

March 23, 2007

WASHINGTON - Roughly 20 percent of the mortgages issued to homeowners in the greater Washington area in 2005 were issued by subprime lenders, with nearly a third of homeowners opting for these higher-risk loans in some jurisdictions, new data shows.

The data, obtained by The Examiner, reveals the number of loans issued by subprime lenders, particularly to homeowners in affluent counties like Fairfax and Montgomery, rose sharply during 2005, the most recent year for which data is available.

The prevalence of these loans lays bare potential risks in the area’s housing market and raises concerns that homeowners in areas where subprime mortgages are concentrated could be at greater financial risk. Initial foreclosures in a neighborhood can trigger a cascade of falling values, forcing down real estate prices and making it harder for struggling families to escape high mortgage payments by selling their homes.

The popularity of these riskier, nontraditional mortgages among suburban homeowners indicates the instruments’ appeal to upper- and middle-income people looking to refinance their homes or upgrade to a larger house.

Median incomes in Fairfax and Montgomery counties rank among the nation’s highest, yet the percentage of subprime loans in Fairfax increased from 3.7 percent in 2001 to 11.1 percent in 2005. In Montgomery, the number of these loans increased from 4.1 percent in 2001 to 15.6 percent in 2005, according to an analysis by the Washington-based nonprofit Urban Institute.

“Even with higher income, you may have got sucked in with a low teaser rate,” Urban Institute Senior Research Associate Peter Tatian said. “People [in Fairfax and Montgomery] will be able to get out of it, it’s just going to cost them some money to do it.”

According to data collected under the federal Home Mortgage Disclosure Act, the regional subprime market has exploded. The number of loans issued by subprime lenders in the national capital region area hit all-time highs in 2005, with nearly one in five loans falling into this category.

The institute classified subprime lenders as any mortgage lender whose subprime loans accounted for at least half of its business. They included 25 counties surrounding the District in its analysis.

The share of the local mortgage market subprime lenders served was 17.6 percent in 2005 — some 2.5 percent higher than it was in 2004 and more than three times the 5.5 percent market share such lenders had in 2001.

The highest percentage of subprime mortgages and high-interest loans were concentrated in Prince George’s County in Maryland and the counties of Maryland and Virginia considered “exurbs,” or rural communities beyond the District’s traditional suburban boundaries.

A subprime lender issued one of every three mortgages in Prince George’s County in 2005, while in Charles County, Md., subprime lenders issued 25 percent of home loans. These loans were also popular in Frederick and Calvert counties, where about 17 percent of mortgages fell into the subprime category.

In Manassas Park City, Va., one in four loans was subprime. Subprime lending rates were lower in Loudoun County, Arlington and Alexandria.

The District also saw a spike in the issuance of these loans. In 2001, subprime lenders issued only 3.2 percent of home loans in the District. By 2005 that number had jumped to 12.5 percent.

The increase in the number of loans issued by subprime lenders comes during what analysts call a meltdown of the subprime mortgage market. Late payment and foreclosures rates are at record highs and many lenders have stopped offering the instruments or have been forced to close, contributing to steep losses on Wall Street in recent weeks.

The meltdown has local, state and federal legislators considering tighter regulations on the market. The District and Maryland are considering measures to increase borrower protections, while lawmakers on Capitol Hill Thursday chastised federal officials for lax oversight of the market.

The market fallout also has sparked fears of foreclosures concentrated in areas where these mortgages are popular, depressing property values and contributing to social welfare problems.

“This is going to become more of a problem,” Tatian said. “There’s going to be more defaults, more foreclosures on these types of loans.”