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Bad Credit Mortgage RefinancingNM subprime: Bad, but not as bad as it could beThe nationwide less-than-perfect-credit mortgage crisis has spread to New Mexico, as subprime delinquencies increased a hefty 25 percent during 2006 -- to the point where now, one in eight of these loans statewide is overdue. Subprime adjustable-rate mortgage performance is even worse, with nearly 14 percent of these loans delinquent here.
And while New Mexico's foreclosure rate on subprime loans is higher than all its Mountain state neighbors except Colorado, there is good news. Real estate values have not fallen here as they have in other parts of the country, putting more pressure on homeowners elsewhere who can no longer count on rising property values to keep them out of trouble. Also, only about 10 percent of New Mexico's mortgages are subprime, below the national average. And, the bulk of them appear to have been made by out-of-state lenders. According to the Mortgage Bankers Association of Washington, D.C., which maintains a database on 43 million mortgages around the country, 12.19 percent of all New Mexico subprime mortgages were overdue as of Dec. 31, 2006. That's a big jump from 9.6 percent past due just nine months earlier, at the end of the first quarter of 2006. At the end of last year, the MBA notes there were 23,490 total subprime mortgages in New Mexico out of a total of 242,963 on the books, or just less than 10 percent. However, as MBA's survey tallies 80 percent of all mortgages nationwide but only about 50 percent of subprime, the subprime percentage is probably somewhat above 10 percent. Nationwide, six million of 43 million loans are subprime, a number that is similarly underweighted but still significantly above New Mexico's rate. Bill Elliott, branch manager of Rocky Mountain Mortgage in Albuquerque and a former president of the New Mexico Mortgage Lenders Association*, quoted government figures that subprime accounted for 10.72 percent of lending in the state during 2005. And he said that while real estate appreciation has slowed from double-digit growth to single-digit, that is still a big improvement over many areas of the country that have seen RE prices actually decline. The 2005 Home Mortgage Disclosure Act figures he supplied showed 8,884 subprime loans made in New Mexico that year, for a volume of $1.07 billion. Total loans for the state were 82,886, for $11.1 billion. While the subprime meltdown might have a dampening effect in the long run, as lenders and investors tighten their standards, in the short term it's an opportunity for local lenders if big national lenders like Wells Fargo, HSBC, Argent Mortgage and First Franklin do less business in New Mexico. Elliott's own company hardly has done any subprime lending, but is seeing an increase of business now. Many borrowers are coming to prime mortgage lenders like his to refinance out of their ill-suited subprime mortgages, he said. Overdues on adjustable subprime, which have been even higher than subprime fixed-rate lending, have risen to 13.89 percent in the state, almost a third higher than the 9.96 percent at the end of the first quarter. Delinquencies on subprime fixed-rate loans are a good deal lower, at 9.38 percent at year-end, according to the trade group. The foreclosure rate on New Mexico subprime was 3.38 percent, well above the Mountain state average of 2.88 percent and below only Colorado in the region, at 5.44 percent. However, in a promising sign, the state's subprime foreclosure rate actually dropped through 2006, from 4.25 percent at March 31, 2006 to 3.38 percent at yearend. And April 2007 showed more good foreclosure news for the state. According to RealtyTrac, an Irvine, Calif. foreclosure specialist, there were 282 actions in the state during the month (both prime and subprime), a drop of 13.5 percent from March and 60 percent from last April. Greg Frost, the founder of Frost Mortgage** in Albuquerque, said most subprime business in the market has been done by local brokers for out-of-state subprime shops like New Century Mortgage, Argent, Fremont Investment, or First Franklin. And, he said some of these out-of-state players haven't done too well by their customers. "There are a lot of loan originators who have availed themselves of the subprime account executives' willingness to take a minimal application from them and finish it, process it, and baby-sit it through to underwriting and closing." These brokers and lenders did not have access to government mortgage programs like the one run by the Federal Housing Administration, a traditional (and Uncle Sam-insured) way for first-time buyers or people with poor credit to access the mortgage market. "So they put someone, who would have been a traditional FHA/Down Payment Assistance borrower at a mortgage banker, into a subprime loan to get to 100 percent LTV (no downpayment) with lower FICO (credit) score requirements." According to Frost, "I have seen many instances of borrowers who would easily have qualified for FHA 30-year fixed-rate mortgages that are in 2/28s and three-year adjustables because their broker did not have the FHA product." Frost pointed out that the continuing increase in real estate values in New Mexico will help many borrowers get out of subprime loans and into prime or government loans like the FHA. This will be true even in the SW and far West quadrants of Albuquerque, where "many will qualify for 95 percent (5 percent down) FHA refis." New Mexico is used to seeing its performance tracked in the bottom tier of the states in many areas, but in foreclosures RealtyTrac, which ranks states by a percentage of defaults per state households, has the Land of Enchantment 36th of 50, descending from worst, quite a decent performance, with a rate of one per 2,768 households. Subprime lending, which has skyrocketed in recent years nationwide, has been in freefall for the past six months. Wall Street firms, the ultimate source of much of the niche's fundings, have seen a blizzard of early payment defaults on subprime loans they have bought and packaged into securities. The Street has aggressively forced the capital-poor lenders to "buy back" the nonperforming loans, and dozens of them have declared bankruptcy, shut their doors, or been acquired. Much of subprime lending has been done by mortgage brokers nationwide. Brokers differ from mortgage bankers in that they don't have lending money of their own, like a mortgage banker or commercial bank or credit union does, but use other lenders' money to "table fund" at closing. Subprime lenders have been accused of lax underwriting, especially with "stated income" lending, and having steered customers into bad adjustable rate mortgages they won't be able to afford when the interest rates reset upwards a year or two after being originated. Brokers, in turn, have pointed the blame back at the mortgage bankers that they act as agents for, saying the standards originate with them. Since subprime mortgage lending targets a high proportion of low-income or minority borrowers, both of which New Mexico is rich in, having a lower-than average rate of subprime lending is an accomplishment. Interviews with local lenders suggest that most of this kind of lending has been generated by mortgage brokers working for out-of-state subprime lenders. Anecdotally, the southwest and far west areas of Albuquerque may be turning out to be subprime problem areas, although hard data is difficult to come by. The largest mortgage lender based in New Mexico, Thornburg Mortgage of Santa Fe, does no subprime lending at all. However, it is quite different from other state-based lenders. While it does some mortgage lending in New Mexico, targeting high-end markets in Santa Fe and elsewhere in the state, the bulk of its lending is generated out-of-state, through an extensive network of hundreds of mortgage brokers and loan "correspondents." Joseph Badal, chief lending officer at Thornburg, explained that the real estate investment trust (REIT) is going the other way from subprime by concentrating on higher and higher credit profiles and loan sizes that have increased in average size from $650,000 two years ago to about $1 million now. Thornburg currently has a pristine balance sheet with just 11 basis points (.11 percent) of its portfolio delinquent, according to Badal. That's a full 1200 BP or 12 percentage points lower than the overdues on the state's subprime borrowers. Charter Mortgage, a unit of Charter Bank, is the largest state-based lender in New Mexico based on in-state volume. Chief executive Glenn Wertheim said subprime makes up only a tiny percentage of the mortgage firm's business. Wertheim said a loosening of underwriting standards in the past several years has made subprime loans "much more risky" and in danger of defaulting. Commercial banks have had "almost no participation" in the niche, especially community banks that value relationships over the number of transactions that can be done. Wertheim noted that the cratering of many subprime mortgage bankers leaves a market opportunity for banks like Charter to pick up new business, using more prudent underwriting standards than they did and using vigorous homeownership counseling. Wertheim said the New Mexico market tended to be more conservative than average. So he predicted that delinquency and foreclosure performance in New Mexico will be "slightly better" than the national average. Looking at the entire New Mexico delinquency spectrum, both subprime and prime lending, the state is performing better than the national average. Its total overdues of 4.3 percent of 242,963 mortgages are lower than the seasonally adjusted average for the country, which is 4.95 percent. So is its foreclosure rate of 0.82 percent, well below 1.19 percent for the United States. A good performance on the prime side has helped compensate for the slipping quality of the state's subprime mortgages. Overdues on prime loans were just 2.4 percent, below the seasonally adjusted national figure of 2.57 percent. And prime foreclosures were at .41 percent, again below the national number of .5 percent. * New Mexico Mortgage Lenders Association Overview PO Box 91058 ** Frost Mortgage Banking Group Overview www.frostmortgage.com | Business Foreclosure |
