WaMu Trying to Cope With Slowdown

Local mortgage giant Washington Mutual has been in the news quite a bit the last few days. On Tuesday, Seattle Times business reporter Amy Martinez made the (not-so-bold) prediction that WaMu won't escape subprime turmoil.

During the housing boom of the past several years, Washington Mutual was among the nation's top lenders in the high-risk sector of subprime mortgages.

Now subprime loans industrywide are failing at an alarming rate.

Although the Seattle-based thrift has cut back its subprime lending, it still has a lot of the loans on its books.

Exactly how vulnerable it remains will become clearer today when WaMu holds its annual shareholders meeting and releases first-quarter financial results.

The high-credit-risk market known as "subprime" represented 9 percent of WaMu's overall loan portfolio at the end of 2006. Analysts who follow the company predict first-quarter profit will suffer as a result.

Un-shockingly, she was proven absolutely correct later that day when WaMu's first quarter results were released:

Washington Mutual Inc. said Tuesday its first-quarter profits slid 20 percent amid a nationwide implosion of the subprime home loan market.
...
Kerry Killinger, Washington Mutual's chairman and chief executive, said the company's retail banking, card services and commercial groups fared well, while the home loan market - particularly the subprime segment for consumers with high-risk credit histories - remained a serious challenge.

Washington Mutual's home loans group posted a first-quarter loss of $113 million compared to a $52 million profit during the year-ago period. The company suffered a quarterly loss of $164 million on sales of subprime mortgages, alone.

To limit further damage as the housing slump continues, Washington Mutual said it had scaled back its subprime portfolio and had set aside more money to cover future loan losses: $234 million for the quarter compared to $82 million in first quarter 2006.

"Over the past 12 months, we have taken a number of prudent actions to reduce our exposure to the subprime mortgage industry," Killinger said in a statement. "These actions, along with a diversified business mix, limited our exposure to the mortgage market's downturn and position us well to expand and grow as market conditions improve."

Among those "prudent actions" is an open offer to refinance some of their riskiest loans into more traditional products at discounted rates:

Washington Mutual Inc. said Wednesday it will refinance up to $2 billion in subprime mortgages to help borrowers avoid default and foreclosure.

The program will allow subprime borrowers who remain current on their existing loans and are bracing for payment increases to apply for discounted fixed-rate loans or other refinancing options.

"Stepping up and helping our customers stay in their homes is in the best interest of our borrowers, our communities and WaMu," Kerry Killinger, chairman and chief executive of the Seattle-based savings and loan, said in a statement.

Will measures like these be enough to keep WaMu from experiencing serious financial pain as the consequences of yesterday's loose lending begin to pile up? Only time will tell, but at least WaMu has one important thing going for it: headquartered in the specialest place on earth!

(Amy Martinez, Seattle Times, 04.17.2007)
(Bill Virgin, Seattle P-I, 04.17.2007)
(Associated Press, KOMO TV, 04.17.2007)
(Associated Press, Seattle P-I, 04.18.2007)
(Bloomberg News, Seattle P-I, 04.18.2007)

Seattle Immune to Financing Woes?

When the question is "how will the current home lending meltdown affect the housing market in Seattle," the answer depends on who you ask. For instance, if you ask #1 Seattle real estate cheerleader Elizabeth Rhodes, the answer is something to the effect of: "Seattle is special. Don't worry your pretty little head about it."

Q: Local real-estate experts keep saying Seattle's housing market will stay strong because the local economy is strong. But I think all the subprime loans going bad will mean a lot more houses on the market and prices here will sink. Why don't you report that?

A: Let's start with an interesting fact from Douglas Duncan, chief economist for the Mortgage Bankers Association: More than one-third of all homeowners have paid off their mortgages (or paid cash). This significantly decreases the potential for overall risk.

However, the growing crisis in the subprime mortgage industry, fueled by an increasing number of mortgage defaults, is real.

How much of an effect it may have is very location-sensitive, said Bob Visini, a spokesman for LoanPerformance, a California company that tracks nationwide mortgage activity.

The Seattle/Bellevue/Everett area "is exposed," but way down the list, Visini said.

The Seattle area is in the bottom 20 percent for subprime mortgages among 331 major metropolitan areas — far below other parts of the country, particularly parts of Texas and California's Central Valley where subprime accounts for nearly a fifth or more of all mortgages. At the top of the list was McAllen, Texas, where some 26 percent of loans are subprime.

By comparison, only 7.9 percent of all Seattle-area mortgages were subprime at the end of 2006 (ranking 278th out of 331), down from 8.7 percent the previous year.

And only a fraction of those loans were in trouble — some 7.6 percent at the end of 2006 were 60 days late or more, a sign foreclosure is looming. This put Seattle in the bottom 10 percent.

Those are certainly some convincing statistics Ms. Rhodes has pulled out. Unfortunately, she still employs her mad misdirection skillz in composing the answer. The reader didn't ask "how does Seattle's rate of subprime mortgages compare to other cities?" Nor did they say "the subprime lending implosion is already affecting Seattle." Rather, they pointed out the high likelihood that the subprime mess will adversely affect Seattle's housing market. Granted, it may not affect Seattle as much as other areas with higher percentages of subprime loans, but there is no reason to believe that it will not have any affect.

On the other side of the media spectrum, ask Mike Benbow of the Everett Herald the same question, and he might say: "Foreclosures are already on the rise, and will likely increase. If the country heads into a recession, the housing market will almost certainly suffer even more."

Others are using risky loans, such as those where they're paying only interest for a while, to get into homes they can't afford. That can only lead to trouble.

In fact, it already has.

A recent article in the Puget Sound Business Journal quoted RealtyTrac Inc. as saying there were 2,377 foreclosures on homes in Snohomish County last year, a 35 percent increase over 2005.

That was lower than King County, where foreclosures rose 41 percent, and Pierce County, which showed a 58 percent hike. But it was higher that the 25 percent increase for the state as a whole.

Such a sharp increase in foreclosures tells us there are problems in the industry.

A local or national recession could trigger even more.

What am I trying to say here?

I guess that a rising local economy has kept the housing market relatively strong locally, but that things could change rapidly if economic circumstances change. Now, more than ever, home buyers should be careful about the types of loans they're using and not expect home appreciation to bail them out of a purchase they never should have made.

Wow, it's refreshing to read something that honest in the media once in a while. Foreclosures up 41 percent in King County? Funny, I must have missed the article in the Times where Ms. Rhodes covered that. I thought our housing market was the picture of perfect health. How could foreclosures be rising so quickly? Hmm.

(Elizabeth Rhodes, Seattle Times, 03.17.2007)
(Mike Benbow, Everett Herald, 03.19.2007)

Mortgage Mess Difficult to Ignore

Take a look at the front page of the Seattle Times website this morning:

Click to enlarge

That's Coalition warns of "mortgage tsunami", followed by Accounting, executives at lender New Century investigated, Fraud charges at Metropolitan Mortgage & Securities settled, and of course Mess unlikely to break economy.

First off, I don't think the term "mortgage tsunami" is appropriate, since a tsunamis come with little warning and through no fault of those in their path. I'd call it more of a "mortgage harvest," considering that the mortgage banks and homebuyers are simply reaping what they have sown.

And why is it that they would like us to believe that the ongoing mortgage "mess" is not going to "break" the economy?

However, while stocks of subprime lenders have been pummeled, the industry's effect on the broader market is likely to be muted. "All told, subprime mortgages are worth about $640 billion, and that isn't chump change," says Bob Gay, economist and managing partner of Fenwick Advisers. "However, it's only 0.6 percent of annual gross domestic product. ... On the consumer side, it's not like every subprime mortgage is going to default and get repossessed."

Delightful. An argument that basically amounts to "because we say so."

Hold on tight and enjoy the ride, everybody.

Seattle Buyers Not Immune to Credit Crunch

As you know, I haven't said much on this blog about the ongoing collapse of lending as we've known it the last few years. This is primarily because the issue is being covered quite thoroughly at many of the other bubble blogs linked on the sidebar. However, a reader sent me a pdf report by Credit Suisse titled "Mortgage Liquidity du Jour: Underestimated No More" that contained the following chart:

Click to enlarge

As you can see, home buyers in Seattle have turned to interest-only and neg-am loans just about as frequently as most of the other "bubbly" cities.

As this easy money rapidly dries up, where does that leave the buyers? Well, I'll defer to the opinion of a "Mortgage Expert" on that one (comment #2):

It’s a real feeling of panic for buyers.

Uh-oh, it looks like we may not be as special as we thought. It would appear that all of Seattle's pretty scenery and "world class" amenities don't count for diddly when loans are no longer being handed out like bread crumbs at the duck pond.

P.S. (I have the report in pdf format, thanks to the reader that emailed it to me, but since I could not find a web link to it, and I don't know the copyright status of it, I have not posted the report online. If someone finds a link to the full report I will add it to the post.)

Let's talk Financing: Gross Income outdated?

Bonus Picture Day (billboard next to Everett Events Center): Looks like the banking industry is aware of the debt picture.

Gross Income outdated?

For years the lending industry has utilized gross income as the yardstick by which consumers are qualified to obtain mortgages. Let's say the median priced home in King County is $465,000. What would the gross income need to be to qualify for this mortgage?

Here's the generic scenario: Specifically, let's use a 100% financed program as our sample; not to ridicule the program, but because it is used so often. Property Taxes are presumed to be $5000/yr. Homeowner Insurance is presumed to be $600 per year. We won't worry about Mortgage Insurance for this illustration. This is just to make you think, so don't pull out your calculators.

A single 1st Deed of Trust loan is $465,000 @ 6% fixed for 30 yrs: Using the Bankrate.com Mortgage Calculator, the Principle & Interest is $2787.91 Now add $466 per month for taxes/insurance, so your total monthly payment is: $3253.91.

If a rule of thumb is to not exceed, say, 33% of your gross income, then what should my income be to qualify for this loan? If your payment is $3253.91, roughly a third of what you make, then you would need gross income to be roughly $9900.00/month. That is a lot of dough.

But, hey! Meet Bob. After tax income for Bob the borrower is actually around $7,000/mo. That's his net income. But, hey! Wait! Bob spends at least $500 per month on utilities and he needs cable to watch pay per view specials like the UFC Championships. And he spends hours blogging, so Bob needs a high speed internet service at $50/mo. He also drives that sweet Acura TL, so his payments are around $600 mo., including insurance--which would have been less, but that's another story. He loves the Sonics and attends at least 2-3 games per season. Bob and his close friends eat out at least once a week and dang it, he wants to go to REI and buy that Thule car roof rack for his new boards that he purchased last year. Up to a few weeks ago (conditions have been horrible recently) Bob was skiing at Crystal Mountain every weekend. That's a hundred dollar day, just to ski and play. When Bob really thinks about it, he's spending about $2000.00 month on food, utilities, car payments, and other stuff. Once in a while he likes to travel.

What I'm illustrating is probably not terribly far off from reality. After tax income on this borrower does not leave very much left for a housing payment, provided the income stated was a full doc loan---full employment and income verified loan. If the borrower did not actually make $9900 mo/ gross (went Stated Income or NINA--no income or asset verified) but ACTUALLY brings home $5000.00 per month, NET, this borrower is on borrowed time.

Fortunately for Bob, his co-worker is also a part-time loan officer! Bob went with an 5 yr. Interest-only ARM, amortized over a 30 yr term. Bob is paying interest only, $2325 plus taxes and insurance, so his payment is about $2791/mo. That is about $500 less than the previously mentioned loan program. He could take that difference and invest it or have more fun. Is this scenario plausible to readers? It should be. It works well with those who use it wisely.

Should the lenders stick with gross income? I'm probably old fashioned, but when I look at my monthly obligations, my decision making (usually) is based upon take home pay, not gross income. Borrowers should know what they actually bring home and use that figure as the real number to stay within their comfort level.