'A Market Way Worse Than Anyone Expects'

From the Sacramento Business Journal:

Residential mortgage lenders are tightening underwriting criteria for people with blemished credit as thousands of homeowners are defaulting on their mortgages. And homeowners who will soon have unmanageable monthly mortgage payments might not find a lender willing to handle their refinancing.

The problems surfaced in the fall with a sharp rise in foreclosures after years of almost none. Lenders in the four-county area took possession of 814 homes in fourth-quarter 2006, a 1,300 percent increase from the same three-month period in 2005.
...
Now, the easy lenders have disappeared from the market in some sudden and spectacular bankruptcies as borrowers face the end of their teaser rate period...Several large national lenders to people with blemished credit were forced to seek bankruptcy protection in the past month, including ResMAE of Irvine and Mortgage Lenders Network USA of Connecticut. Some of the big players, such as HSBC Holdings PLC and New Century Financial Inc., recently have warned of major problems.
...
"It is not unusual for someone who makes $4,500 a month to have a mortgage payment now of $1,700, and when that loan adjusts, it will go to $3,200 a month," said Scott Thompson, owner of Short Sale Resolution Services in Carmichael. Thompson for 15 years was co-owner of Thompson & Brown, a real estate brokerage company.

"A year ago, I was uncomfortable with the market, so I started my own business for short sales. I think we are about to see a market way worse than anyone expects. This is going to be bad," he said. "In past declines, borrowers were $200 or $300 a month away from making ends meet. Now, when these option ARM loans adjust, people are not even close to making ends meet."
...
"It doesn't matter if the fault is with the people who sold these loans or if it was with the borrowers who exaggerated their income to get the loan," Thompson said. "Everyone was caught up in the real estate hype. And that is now coming home to roost."
...
Faced with a new, higher mortgage payment, people are looking for new loans. Many are not finding them. "In some markets, over 90 percent of the people who come to us for help are in properties they shouldn't be in," said Ed Shanks, executive vice president of national retail lending for U.S. Bank in Minneapolis. "That, combined with the decreasing appraisal value of their home, is turning into a perfect storm."

Wells Fargo Bank this month tightened its underwriting standards. It reduced by 5 percent the maximum loan-to-value ratio it will lend to subprime borrowers in declining markets. A declining market is one in which house values are either going down or staying flat, said Wells Fargo spokeswoman Julie Campbell. All four counties in Greater Sacramento are included under that definition.

"Clearly, across the board, we are seeing tightening in underwriting," [Jeff] Tarbell, [owner of ATM Mortgage in Sacramento] said.

The loose underwriting tended to be done by mortgage companies, but the heat is being put on all financial providers. Banks are being told by regulators to underwrite even their nontraditional loans -- such as option adjustable rate mortgages (ARMs) -- as if they were traditional, fully amortizing loans. The criteria will take many lenders out of the subprime loan market and could even remove some of the investment money from the secondary market that funds such loans.

"We are just beginning to see the tip of the iceberg on this," CoreLogic's [Anthony] Romano said.

From the Sacramento Bee:

The economy is bearing up well, in Sacramento and across the country, despite the weakened housing market, a Federal Reserve economist said Friday.
...
Sacramento, even though it's faced some of the worst of the nation's housing slump, continues to generate decent job growth, she [Janet Yellen] said.

The "overall health of the local economy," including renewed hiring by state government, should help Sacramento avoid a repeat of the significant recession that engulfed the area in the early 1990s, Yellen said during a speech at California State University, Sacramento.

"While the pace of employment growth slowed last year in the Sacramento area, as it did in the rest of the state, the state government's fiscal situation has improved over the past few years, and that's helped create new jobs locally and keep the area economy on a stable expansion path," Yellen said.

She added that "there are signs of stabilization" in the Sacramento housing market. DataQuick Information Systems, which tracks the housing industry, reported recently that while sales activity in Sacramento is still in a slump, the decline in prices has slowed.

From the Sacramento Business Journal:

Less than one in 10 families, or 9.2 percent, earning the annual median income of $65,400 could afford a home in the Sacramento region during the past quarter, but that was better than the 7.9 percent rate in third-quarter 2006, according to a California Building Industry Association report released Thursday. Despite the increase, the affordability rate, which also includes the area's median-price of $370,000 for the just-completed quarter, makes the region the 18th-toughest market for home shoppers.