An End to Easy Money
Subprime Mortgage Lenders Retreat, Leaving Brokers and Buyers in the Lurch

By Dina ElBoghdady and David Hilzenrath
Washington Post Staff Writers
Saturday, March 10, 2007

Even before Goodman Griffin and his girlfriend began house-hunting a month ago, they sat down with a mortgage broker and were pre-qualified for the nontraditional loan they needed to purchase the kind of home they wanted.

So it came as a shock when the loan they thought they had was yanked away from them this week just as the seller accepted their contract on a four-bedroom, $300,000 house in Prince George's County.

"We've been on a merry-go-round, thinking we're going to get the loan, then thinking we're not going to get the loan," said Griffin, 45, who has rented a house. "We have no confidence at this point that we're going to get the house."

More would-be home buyers with blemished credit histories may soon be shut out of the housing market now that lenders are curtailing the number of loans to risky, or subprime, borrowers such as Griffin.

During the first half of this decade, when housing prices spiked, lenders chased after such borrowers, making it easier for them to buy homes they otherwise could not have afforded. But after the housing market cooled last year, delinquencies and defaults spiked, forcing more than two dozen lenders to close, sell themselves to larger firms or report staggering financial losses. Some have chosen to get pickier about borrowers -- a course encouraged by federal regulators.

General Electric's U.S. mortgage arm this week laid off a fifth of its workers because of a jump in defaults and has stopped making some risky loans. New Century Financial, one of the nation's largest lenders to subprime borrowers, said Thursday that it had stopped accepting new loan applications under pressure from its creditors.

BNC Mortgage, the lender that last month pre-qualified Griffin and his girlfriend, chose to tighten its rules. That's why the company withdrew its offer to grant the couple a 100 percent loan, meaning it would not have required them to put any money down, said Matt Smeltzer, a BNC sales executive.

BNC now demands higher credit scores for such loans than it did a month ago, when the couple began the process. "I'm probably turning away about 50 percent of those loans, whereas before I would reject maybe 30 percent of them," Smeltzer said.

Mortgage brokers often get to deliver the bad news because they're the middlemen between borrowers and lenders. Larry Pendleton, a broker with Legend Mortgage in Olney who had been working with Griffin and his girlfriend, has been shopping for a new loan for the couple. The best he could find would cost $2,500 a month instead of $2,300.

"They have some strikes against them," Pendleton said. "They have a decent income of about $110,000 combined, but their credit record is not so great and they have no money for a down payment," which made the 100 percent loan necessary.

Those 100 percent loans, and loans that do not require borrowers to document their income, have been the first ones dropped by some lenders because of their risk. But there are many other types of loans, because as home prices climbed, consumers demanded nontraditional mortgages that lenders happily delivered. Other loans include adjustable-rate mortgages that offer tantalizingly low teaser rates that rise, or balloon, in later years.

The thinking was that as long as home prices kept rising, people could sell their homes or refinance themselves out of trouble. But after prices leveled off last year, delinquencies and defaults followed.

In the Washington region, the default rate for subprime loans jumped to 7.2 percent in December, up from 2.9 percent a year earlier, said Michael D. Youngblood, an analyst with of FBR Investment Management. Youngblood defines defaults as loans that are at least 90 days delinquent or are in the foreclosure process.

The local numbers are in line with the national trend. David Liu, an analyst with UBS, said that of all the loans originated in 2006, the default rate for those 60 days or more delinquent has exceeded 10 percent, more than double what it was in late 2005, when the rate was just above 4 percent.

"This is the highest rate we've had since the mid-1990s," when the subprime portion of the mortgage market broke off into a free-standing industry, Liu said.

The industry typically works like this: Mortgage brokers sell the loans to lenders or Wall Street investment firms, which then package them into securities. The mortgage-backed securities are bought as bonds by such investors as pension funds.

"As these defaults accelerate, the end investors are getting spooked," said Michael Larson, a real estate analyst for Weiss Research. "These mortgages are going bad so fast, that makes them want to buy fewer of the bonds and that means Wall Street investors have trouble packaging the securities and it trickles on down the food chain."

That's when the mortgage brokers, the folks on the front lines, start feeling the squeeze, as Daniel Walsh can attest.

"We have had to tell customers that were dreaming and hoping of finding a place to sort of put their search on hold because of the way the market has turned," said Walsh, president of Guardian Funding, a lender and broker in Kensington.

The firm's motto has been "When others say no, we say yes." But recently, "we've been saying some no's," Walsh said.

One of the national lenders that recently closed gave almost no advance notice, leaving borrowers up in the air, said Tysons Corner mortgage broker Abe Nejad.

"They were sitting on a pile of loans that were set to close on the very day they closed their doors. They had to call brokers like me and say, 'Hey, sorry, I know you have 10 loans that were supposed to close with us this week, but unfortunately . . . we're not able to close any of them.' "

This week, another lender notified Nejad's office that it was discontinuing 100 percent loans, leaving in the lurch a restaurant manager with a wife and three kids who had packed his belongings and was set to complete the purchase of a $350,000 house in Manassas next week, Nejad said. Now, in addition to losing the house, the immigrant from El Salvador is likely to lose a $1,500 deposit, Nejad said.

"There's nothing we . . . can do for this particular person right now," said Nejad, branch manager for North Atlantic Mortgage.

But some lenders and housing counselors are cheering the crackdown, saying it will prevent home buyers from getting in over their heads.

"Some of these people who come into our office need more time before jumping into the housing market," said Marcia J. Griffin, president of HomeFree-USA, a D.C. nonprofit group that helps educate home buyers.

In her opinion, having lenders hold off on financing homes that people can't afford is a development that's "heaven sent."