Lenders Liberalize Loans for Cash-Poor Home Buyers : Credit: More people realize the American dream. But their riskier debt could fuel a rash of foreclosures.
When Ann Hadsell’s parents bought their $14,000 Westchester home in the 1950s, it took them three years and a lot of overtime to save the $1,000 down payment.
There was no such struggle for their daughter. She recently bought a $190,000, four-bedroom home in Santa Clarita with no down payment at all.
“It’s nearly impossible to save a down payment today,” said Hadsell, 42, who only had to pay closing costs on her house. “By the time you make your car payment, pay bills and go out to dinner, there’s nothing left.”
Like Hadsell, many Southern Californians are short on savings, so lenders are adapting to the new environment.
“The average consumer thinks that it takes 25% down and perfect credit to buy a home. It doesn’t,” says Rick Cossano, head of mortgage origination at Countrywide Funding in Pasadena. “It’s a different lending environment than it was even five years ago. We look at loans carefully, but we are more liberal.”
Liberal seems to be the new standard in the home financing game. Lenders are bending old rules and easing requirements like never before to get the dollars flowing again throughout the moribund Southern California housing market.
Here’s some of what’s now available:
* An array of low-down-payment home loans, in some cases requiring no money down.
* Relaxed credit standards and escrows you can open with a credit card.
* “Upside-down equity loans” for as much as $35,000 to homeowners who already owe more to lenders than their houses are worth.
As Southland home values have plummeted an average of 22% in the last five years and foreclosures have skyrocketed, lenders are facing tough competition for new customers. They have cast their nets wider, sometimes catching folks with less-than-stellar credit and little savings cushion.
This increase in riskier home loans also comes at a time when California is just emerging from the recession and consumers are beginning to load up on credit card and other debt again.
Looser lending standards do tend to help jump-start the local economy and allow more people, especially new immigrants, to achieve the American dream of homeownership.
But critics caution that a slippage in lending standards for home loans could mean more delinquencies and foreclosures later. If enough buyers with little or nothing at stake decide to toss the keys in the mailbox and walk, it could create yet another housing crisis for Southern California.
Lower Down Payments
“In California these high-risk home loans will increase the chance of more delinquencies, especially if we see another economic downturn,” says Nima Nattagh, analyst with TRW REDI Property Data, a real estate data firm in Anaheim.
“Borrowers who are banking on housing prices going up--they’ll be in for a shock.”
The popularity of riskier loans is growing across the country, although it is much more pronounced in Southern California.
Nationally, the average down payment for conventional mortgages for new buyers has dropped from 25% in 1991 to 19% in 1994, according to Federal Home Loan Bank.
In California, separate data from TRW REDI Property Data shows a more dangerous trend.
Just four years ago, only about 20% of mortgages were considered risky loans, those with down payments of 10% or less.
But in the first nine months of this year, 42.4% of all mortgage loans made in California had down payments of 10% or less. In Southern California, these constitute 46% of all mortgages.
And not only are there more risky loans in Southern California, more of these brand-new loans already are delinquent, according to San Francisco-based Mortgage Information Corp., which monitors loans of about 16 million Americans.
The number of new borrowers in Southern California seriously delinquent on payments as of September had nearly doubled from the same time last year. Analysts are concerned because these delinquencies are on loans made just this year.
Typically when people first get their loans, they are careful about making payments in the first year. Delinquencies generally rise in later years when job loss or other unforeseen troubles affect the ability to make mortgage payments.
Some of these delinquencies involve adjustable-rate mortgages, which attracted buyers with low “teaser” rates that have since gone up to market averages, prompting some buyers to struggle to make payments.
“There’s no question that this is alarming,” said James Doti, an economist at Chapman University. “With debt levels already high, this kind of borrowing could weaken the economy. This could question the viability and strength of this recovery.”
Regulators are getting concerned about the new risks being taken on by lenders and homeowners.
Last month, the Office of the Comptroller of the Currency released a survey of 40 major national banks that found that many had relaxed consumer loan standards to compete for new business. The regulators found lower down payments, longer term loans, lower loan fees and interest rates, and increased use of teaser rates, especially in home equity lending.
“This survey is a wake-up call for the banking industry,” said Jimmy Barton, chief national bank examiner for the comptroller. “If the economy starts to turn and things go down, these home mortgages and retail loans will be the first to go.”
Traditionally, banking customers were ranked A, B, C and D, with the banks serving the A group, those with the best credit rating and performance, for all types of consumer loans.
Now, the competitive environment is forcing banks to lend to the B and C customers, a market typically served by finance companies, which charge higher interest rates than banks.
To get these customers and comply with new laws requiring more loans to lower-income buyers, lenders are easing loan requirements. Major banks such as First Interstate have introduced special programs in recent years, some for first-time or lower-income buyers, that require just 5% down and allow certain credit blemishes such as multiple late payments.
Bank of America, California’s biggest mortgage lender, has several new deals. One program for low- to moderate-income borrowers offers a home loan with only 3% down, even if buyers don’t have a credit history. And last spring, the bank unveiled a 100% home equity loan of up to $50,000, which allows homeowners to borrow against whatever equity is in their home.
“It’s [primarily] for people who have suffered from the real estate decline in recent years,” said spokesman Richard Beebe. “We’re looking for people who have shown they can manage credit well. We’re pretty careful.”
A banker’s job has gotten much tougher. As they weigh how far out on a financial limb to go to get the business they need, bankers are struggling to define appropriate loan standards.
“Our guys feel like they are in a vise,” said Brian Chappelle, spokesman for the Mortgage Bankers of America Assn., a Washington trade group with 2,700 corporate members.
“If lenders swing too far one way, people say they are being fiscally imprudent,” said Chappelle. “If they turn too far the other way, everyone says they are keeping people from achieving the American dream of homeownership.”
But critics say the lenders are making loans that will create problems later.
Even beleaguered home builders are jumping into the act. For the first time ever, California’s largest home builder, Kaufman & Broad Home Corp., began offering no-down, adjustable-rate loans last year. The loans were so popular, they offered them again early this year at a fixed interest rate.
Under the program, Kaufman puts up the down payment and as long as buyers make payment on time for three years, they don’t have to pay it back. There are no minimum salary restrictions.
“The response was phenomenal,” said Mark Cirvelli, senior vice president with Kaufman & Broad Home Mortgage Corp. “A lot of people don’t realize how little it takes to get into a home these days.”
One of those people was Donald Harrell, 26, who with his wife Stephanie got a no-down loan on a $186,000 Foothill Ranch home. The couple, who thought their $5,000 in savings wouldn’t allow them to buy a home, only had to pay about $4,700 in closing costs and moved in.
“It was an amazing policy,” said Harrell. But now his adjustable rate monthly mortgage payment has gone up in one year from $1,550 to $1,775. And they’ve added about $2,000 in new credit card debt to furnish, decorate and maintain their home.
“We needed to do landscaping, but we had to pay our mortgage. So we put it on the card.”
Loans such as the Harrells’ are typically insured, often by major insurers such as Milwaukee-based Mortgage Guarantee Insurance Corp.
But lately, the insurers have gotten concerned. Mortgage Guarantee Insurance Corp. recently surveyed the performance of $1.5 billion of affordable housing loans insured in 1992 and 1993 and discovered “higher-than-expected default rates.”
But many lenders such as Irvine-based American Savings, the state’s second-largest mortgage lender, argue that these higher-risk loans are essential if first-time home buyers, especially immigrants, are to get into homes.
Eugenio Pintor, 29, and his two brothers just bought a $148,000, four-bedroom Santa Ana home with a 5% down mortgage from American Savings. Eugenio, Rafael, 31, and Manuel, 27, who all work in the electronics industry in Orange County, pooled their cash to come up with the down payment. Now the three, along with Eugenio’s wife and 5-month-old daughter, live together in the house.
“Now that I’m a homeowner, I want to stay here,” Eugenio said. “When we told our family we had bought a house, they couldn’t believe it. Even when they came and saw it, they couldn’t believe it.”
Although the three men did not have an established credit history, by showing electric and water bill payments over the years, the men were able to get a home.
“They think if you own a piece of America, the United States, you are here to stay,” said Dinorah Carmenate, a co-owner of Century 21 in Santa Ana, which sells more than 90% of all homes to recent immigrants. “They will do whatever it takes to get a home.”
Flexible Credit Standards
At Sanwa Bank in Los Angeles, California’s fifth-largest bank, the most popular loan is a 5% down loan that is directed at first-time home buyers. Open to all income levels with only $350 in closing costs, the loan doesn’t require a standard credit history.
Young buyers or immigrants can get homes with more flexible credit standards, using utility bills or rent payments to establish a history.
“We’re having to do creative things to get people into houses--there’s no question,” said Christine Larson, head of consumer lending at Sanwa Bank. “But if we put people in these homes that shouldn’t really be there, then that’s not good for them or us. It’s a question that we’re all struggling with.”
Recently Sanwa debated offering a 100% equity loan. The loan would have been a first for the bank and a major departure in its lending practices, Larson said. But the bank decided against it.
“We want to be creative, but we stopped short of being creative when there’s no equity,” she said.
But lack of equity hasn’t stopped Citizen’s Thrift & Loan in Tustin.
The tiny thrift is a pioneer in what it calls “upside-down home loans,” loans for owners who are “upside down” on their loans, owing more on their home than it’s worth.
Found in only a few places in Southern California, these loans allow people to borrow up to $35,000 at about 15% interest and spend most of the money however they want.
The loans are different from Title I, Federal Housing Administration loans, under which any credit-worthy person, even with little or no equity, can borrow up to $17,500 to be used only for home improvements.
The upside-down loan is designed as a personal loan, with rigorous credit standards. The loans are in high demand at Citizen’s, a hybrid bank and finance institution that typically specializes in a narrow segment of consumer and home-improvement loans.
Citizen’s is approving about 350 of the loans a month, up from 100 a month last year, when the loans were first introduced. Upside-down loans now comprise 80% of all loans at Citizens, which has about $135 million in assets.
“So many people here have no equity left--nothing. But they still want to buy cars and send children to college,” said Mike McGuire, president of Tustin-based Citizen’s Thrift. “Our customer is someone who has a good job and not too much debt; he’s just in the unfortunate position of having no equity left on his house.”
While Citizen’s claims the loans may be tax-deductible because they are pegged to a home’s value, the Internal Revenue Service thinks otherwise.
If a loan amount exceeds the current home equity, “it’s not deductible,” said IRS spokesman Keith Kimbell.
Even if they are controversial, the “upside-down” loans are lifeboats for people such as Elsa Broduer and her husband John.
The couple was drowning in $6,000 in medical bills and $2,000 in credit card debt at 25% interest. Those debts, coupled with their daughter’s college tuition and a Garden Grove home on which they owed more than it was worth, made matters worse. Unable to juggle all their payments even though both were working, the couple debated foreclosure.
That’s when they opened a letter about an “upside-down equity loan.”
The Broduers, who had a good credit history, were able to borrow $25,000 on their home at 15.9% interest. They used it to pay off debts and increase their cash flow.
Said Elsa Broduer, 48, an Orange County employee: “I don’t know what we would have done without it.”
* CREDIT HISTORIES: A look at three Southern California families’ credit problems and home loan solutions. D1
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
On the Brink
* SUNDAY: A new wave of consumer debt buildup threatens the Southern California landscape.
* TODAY: Mortgage lenders push easier loans to a new class of high-risk homeowners.
* TUESDAY: Young adults struggle to cope with their escalating debt burdens.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Homes on the Fiscal Fault Line
Trying to revive a moribund housing market, Southern California lenders have loosened qualifying standards in the last year. For some buyers, that’s meant an entry into their dream house. But an increasing number of new homeowners is having trouble making payments. An overview of low down payment loans, delinquency rates and home values:
Little or No Down
Mortgages with down payments of 10% or less are considered risky by analysts. But such loans are proliferating.
*--*
Loans with down payments As County of 10% or less % increase of al 1991 1995* 1991 Los Angeles County 13,787 26,168 90% 16% Orange County 4,417 8,310 88% 13% Riverside County 7,816 10,058 29% 39% San Bernardino County 9,613 10,444 9% 42% San Diego County 7,048 8,728 24% 22% Ventura County 857 2,433 184% 9% Southern California 43,538 66,141 52% 21%
a % County l loans 1995* Los Angeles County 42% Orange County 36% Riverside County 63% San Bernardino County 65% San Diego County 42% Ventura County 35% Southern California 46%
*--*
* Through Sept. 30
Note: Does not include refinanced loans or home equity lines
*****
Delinquent Loans
An increasing number of buyers who made a relatively low down payment are straining to make their monthly payments. Percent change of delinquent loans among homeowners with a down payment of 20% or less, from 1994 to 1995 through September:
California: 73%
Southern California: 85%
Los Angeles: 120%
San Bernardino: 14%
Orange: 233%
Ventura: na
Riverside: 14%
San Diego: -13%
Note: Data for San Bernardino and Riverside counties is combined. No applicable figure for Ventura County.
*****
Declining Home Values
Double-digit declines in home values have left many Southern Californians owing more on their houses than the houses are worth. Third-quarter percentage change in home values, 1990 to 1995:
California: -16.8%
Southern California: -21.1%
Los Angeles County: -24.4%
San Bernardino County: -19.3%
Orange County: -18.3%
Ventura County: -17.9%
Riverside County: -17.7%
San Diego County: -13.5%
Sources: TRW REDI Property Data, KPMG Peat Marwick, Mortgage Information Corp.
Researched by DEBORA VRANA and JANICE L. JONES / Los Angeles Times
