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Loan crisis hits home
New limits may lead to downturn in Kern's housing boom
| Saturday, Mar 17 2007 8:50 PM
Last Updated: Saturday, Mar 17 2007 8:54 PM
The party is officially over.
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A booming housing market that spurred an increase in no-down, fully financed loans has gone flat.
The purse strings are drawing to a close as defaults on so-called "subprime" mortgages skyrocket.
With Wall Street and Congress focusing national attention on these risky loans, would-be local homebuyers -- especially those with credit problems and small bank accounts -- are finding it harder to get a home loan.
Some who would have qualified not long ago are being turned away by skittish mortgage companies.
The new restrictions on home loans threaten to curtail an important source of home sales that helped fuel the area's recent housing boom. Some Bakersfield real estate professionals fear it could slow the overall home market.
There seems to be a consensus that lending standards were too lax and now the market is paying for years of easy credit.
Mortgage broker Frank St. Clair, owner of St. Clair Realty in Bakersfield, said overly liberal subprime lenders "are reaping what they sowed now."
"Bad loans were made to people that couldn't really afford them," said Diane Boultinghouse, manager of A2Z Escrow in Bakersfield. "So now you're seeing notices of default going up like crazy."
Dissolving dreams
In a recent example of the impact the restrictions are having, a local couple were preparing to buy a home earlier this month, having been pre-approved for a loan despite having little money in the bank and a relatively low credit score. (Two people involved in the deal agreed to discuss the couple's experience but declined to identify them.)
Shortly before escrow was to close, their lender canceled the loan. The sale dissolved.
"Two, three months ago, this would have gone through," said Anthony Kessler, the couple's Bakersfield loan officer.
The couple's realtor, Diana Williams of Touchstone Real Estate Group, said they should not have qualified for the loan in the first place. Instead, they should have been counseled to shore up their finances before attempting to buy.
"They had their heart set (on) becoming homeowners," she said. "... Now they've somewhat lost faith in the system."
Tight finances rarely stopped people from buying homes in the heyday of subprime mortgages.
In 2002, subprime mortgages -- defined as zero down home loans with above-market interest rates -- were unheard of in Bakersfield.
In 2003, lenders gave out five such loans in Bakersfield, or less than 1 percent of all home loans made in the city, according to Fidelity National Information Services.
Three years later, in 2006, more than 1,600 Bakersfield homebuyers were able to take out a subprime loan, accounting for 6.5 percent of all home loans in the city that year.
But recently several large public companies, trying to cope with missing and late payments from subprime borrowers, have stopped offering fully financed loans. Lenders and real estate agents are telling some applicants to come back only after repairing their credit and saving up for a down payment.
Defaults up
The change in policies may have come too late. Nervous investors have hammered the stock prices of New Century Financial Corp. -- the company that had initially backed the Bakersfield couple's loan -- and other national lenders heavily invested in subprime loans. Some two dozen companies specializing in subprime mortgages have gone belly up.
That has economists wondering whether the worst of the housing slowdown is past -- and what impact widespread defaults could have on the economy.
Members of Congress began weighing in last week. Sen. Hillary Rodham Clinton, D-N.Y, declared to a group of activists, "We've got to take action" to stem subprime-related foreclosures. Fellow Democratic presidential hopeful, Sen. Christopher J. Dodd, D-Conn., chairman of the banking committee, called for hearings on "the subprime crisis."
On Tuesday the Mortgage Bankers Association reported that a record number of homes -- 0.54 percent of all mortgages nationally -- entered foreclosure in the fourth quarter. The news was blamed for pushing down the Dow Jones industrials more than 240 points -- its second-biggest drop in almost four years.
In the Bakersfield area, February notices of default -- sometimes a precursor to foreclosure -- were up more than sixfold from a year before at 275, down slightly from 284 in January.
One reason cited for the increase in defaults is that interest rates on subprime loans with low introductory rates have recently reset higher, which translates to higher monthly payments. Some homeowners find themselves unable to make up the difference.
Glutting the market
Some Bakersfield real estate professionals have voiced concern that homeowners unable to pay their mortgages will try to sell, adding to the number of homes on the market. That could pull down housing prices further.
Local appraiser Gary Crabtree, who produces monthly reports on the Bakersfield home market, said the number of sales per month could decline by 25 percent or 30 percent because of factors including the difficulty of getting a subprime loan.
St. Clair, the broker at St. Clair Realty, foresees only a temporary slowdown in the local home market as a result of the new subprime restrictions. "It's the entry-level homes that are going to get hit hardest," he said.
Others in local real estate play down such worries, saying home sales are merely returning to a normal pace after reaching unsustainable levels. The Bakersfield market, they point out, remains much more affordable than other areas around the state.
So, rather than the "superior market" of the past three years, Glenn Porter, part owner and broker of American Star Financial Group, said he is seeing "more of a steady, normal kind of market."
The pace of home sales is down significantly from the strong market of a year ago.
In January, 274 existing homes sold in the Bakersfield market, down 24 percent from a year before, according to a recent report by Crabtree.
The number of new home sales that month, 160, was down 53 percent from January of 2006.
But prices have held fairly steady.
For an existing home in January, Crabtree reported, Bakersfield's median price -- the point at which half the homes sold for more and half sold for less -- was $275,500, down only 0.8 percent from a year before.
January's median price for a new home was $317,250, down 7.2 percent from January of 2006.
Problems facing the subprime mortgage market aren't expected to affect most homeowners.
But those who hope to sell could have a harder time if the number of houses on the market rises. And people hoping to refinance now may face stricter requirements, in part because home prices have fallen and lenders are hesitant to make loans to people who owe more than their homes are worth.
Even though fully financed loans are harder to get, they can still be found. But gone are the days when marginally qualified borrowers could qualify for a loan with no money down, Porter said.
"It just has to be more documentable," he said. "It has to be people who qualify."
The Associated Press contributed to this report.