Sunday, August 12, 2007

One street's subprime struggle

Foreclosures and forced sales mar a Santa Ana street after years of subprime lending.


"When I talk to you about gangs and graffiti, it's when usually the houses are empty. They have access to do their thing. And it's not really good for the kids to watch those kinds of things." -- Jose Ramos, father of four who owns two homes on the block .



See how individual homes on Camile Street were affected.
http://www.ocregister.com/ocregister/se ... /subprime/


Collapse of subprime lending is likely to affect some California counties more than others.
http://www.ocregister.com/ocregister/se ... alifornia/


By JOHN GITTELSOHN and RONALD CAMPBELL
THE ORANGE COUNTY REGISTER

The frenzy of subprime lending that pumped billions to lenders and Wall Street investors has devastated West Camile Street, where working class families signed up for risky home loans they thought would bring them the American dream. (VIDEO: Go inside some of the homes on the street.)

An Orange County Register investigation found that lenders targeting Hispanic buyers wrote $19 million in loans on this modest Santa Ana block of 1920s bungalows, where roses and jasmine bloom behind white picket fences. Those loans helped nearly triple sales prices from $182,000 to $600,000 over five years. Some owners got cash out. Others sold for big profits.

Then the credit stopped. And home values crashed.

Lenders seized the homes at 920 and 946 after owners failed to keep up with payments. 946 sold at a loss, and 920 is in escrow at a loss. Lenders also filed default notices against the owners of 926 in April and 937 in June. "For Sale" signs hang outside five of the remaining 48 homes. Desperate to escape escalating payments, the owners of 937 and 1033 have slashed prices.

A year ago, Angelita Medina Albarran, 47, a garment worker at St. John Knits, took out two loans from Fremont Investment & Loan to cover the entire $600,000 purchase price for 919 W. Camile St., a 1,450-square-foot bungalow. Her five grown children help pay the mortgage – $4,000 a month and scheduled to rise in May.

"La droga," Medina Albarran said. That's Spanish for "drug" – Mexican slang for a crippling debt. The people of West Camile Street, she said, are "endrogados" – hooked on debt.

A Register analysis of federal housing data pinpointed West Camile Street as a center of the subprime borrowing binge. In 2005, 75 percent of the home loans in the surrounding census tract were subprime.

That's the highest concentration of subprime loans in Orange County and one of the densest in California. More than 200 neighborhoods in California, particularly in south Los Angeles and the Inland Empire, were similarly dependent on subprime lending. So were at least three dozen counties in other states.

For these places the story of Camile Street is a warning of things to come.

On Camile Street every variety of la droga is on display: adjustable-rate loans with low teaser payments that quickly escalate; prepayment penalties so large that homeowners cannot refinance; "piggyback loans" so low-income buyers can own a house with no money down. All are described in long, complex documents that many Spanish-speaking buyers cannot read.

The Register found that the brokers and lenders gave little consideration to the long-term performance of a loan or to borrowers' future. Subprime loans became the dominant source of funding for black and Hispanic buyers. Now the hidden costs of these loans are coming due, blighting neighborhoods as surely as any drug plague.

Residents, many of them former renters, saw the loans as a path to middle-class stability. Some did not understand the loan documents they signed. Others saw the risk but counted on being able to refinance before payments got too heavy.

From April through June a record 17,408 California homes were lost to foreclosure, according to DataQuick Information Systems, a La Jolla real estate tracking company. The Center for Responsible Lending, which opposes predatory lending, estimates that 23 percent of subprime mortgages made in Orange County last year will end in foreclosure. That would be about 2,500 of the 11,000 homes bought with subprime mortgages, or 7 percent of the 36,000 homes bought last year in Orange County.

For West Camile Street residents like Medina Albarran, the outlook is dire.

During the boom years, finding another loan with another low-interest teaser rate was easy.

But now interest rates are rising, driving up the cost of borrowed money. With property values falling, lenders are reluctant to offer 100 percent loans like the ones she and many of her neighbors got. At the insistence of federal regulators, lenders now demand proof of income, bigger savings accounts and higher credit scores.

With neighbors asking $150,000 less than Medina Albarran borrowed a year ago, the situation has become almost hopeless.

Even if Medina Albarran can somehow refinance, she said, she faces a prepayment penalty on her loan. She wouldn't say how much the penalty is, but prepayment penalties typically exceed 3 percent of the loan principal. For her that would be more than $18,000.


'House of cards'

Subprime lenders have long argued that their mortgages have helped millions of Americans who might not otherwise have been able to buy a home do so – people with poor credit, spotty work histories or unreliable incomes.

That's true.

But now there are hundreds of thousands of borrowers who can't repay their loans.

Why would lenders make loans customers can't afford?

The answer is that none of the loan professionals had a long-term stake in the borrowers' ability to repay the mortgages.

The brokers made their money closing loans.

The lenders made their money reselling loans to Wall Street investors.

The investors got high yields with little risk, as long as most homeowners could refinance or sell at a profit.

Subprime loans ignited a frenzy of deal-making on West Camile Street. From 2000 through 2006, 14 of the 48 homes changed hands, some repeatedly. The owners of those 14 homes and three others piled up 79 mortgages from 48 lenders.

"This was a house of cards. The loans were betting on continued housing price appreciation, with the likelihood that the loans would have to be refinanced," said Paul Leonard, California director of the Center for Responsible Lending.

"The biggest price is being paid by the borrowers, who were put into loans they never should've been under the guise they could be long-term homeowners," he said. "And now they're faced with losing their equity and having their credit destroyed and, in fact, with losing their homes."

As prices soared, everyone wanted in. Then prices started to slide, and everyone wanted out.

Mortgage defaults soared. Wall Street cut off credit to lenders who had sold them bad loans. Dozens of lenders shut their doors, laying off 5,000 in Orange County alone. Foreclosure rates exploded.

A 2006 Fannie Mae report estimated that a single foreclosure reduces neighborhood home values by almost 1 percent. In the 92703 ZIP code, which includes Camile Street, 110 properties are listed in foreclosure by RealtyTrac, an Irvine company that tracks distressed properties.

Many on Camile Street are caught in the downturn.

In January 2006, Maria and Gregory Vertiz paid $591,000 for 937 W. Camile St. using 100 percent subprime financing. The lender filed a default notice in June after the couple missed $14,000 in payments. The house is on the market with an asking price of $420,000 – a 29 percent drop.

The bank foreclosed last year on 920 W. Camile St. Property records show the last owner paid $565,000 in November 2005, using 100 percent financing from America's Wholesale Lender, a subprime subsidiary of Countrywide Home Loans. The house is in escrow for $449,000 – a 20 percent drop.

Another bank repo is the 1922 Craftsman-style bungalow advertised as a two-bedroom, one-bath at 946 W. Camile St. It still has the original hardwood floors, built-in cabinets and a faux fireplace surrounded by green tiles. But the last owner added four bedrooms and two toilets without permits in an effort to pack in more tenants to help pay the mortgage.

The home is vacant, its exterior tagged with gang graffiti.

It sold July 31 for $425,000, a 17 percent loss.

Keeping it difficult

Fremont Investment & Loan offered 100 percent financing for the house at 946, among at least six mortgages the Brea-based company sold on the block. In March, the Federal Deposit Insurance Corp. ordered Fremont to close its subprime arm, because it issued predatory loans that borrowers couldn't repay.

Eight mortgages on the block were sold by Ameriquest Mortgage Co. and other subsidiaries of Orange-based ACC Capital Holdings. That company paid $325 million in 2006 to settle predatory-lending investigations in 49 states.

Other subprime lenders on the block included now bankrupt New Century Financial and People's Choice Home Loan, both of Irvine. ConquistAmerica of Santa Ana, Option One of Irvine and Quick Loan Funding of Costa Mesa are other troubled Orange County subprime lenders that issued mortgages on Camile.

Located in one of Orange County's most Hispanic census tracts, Camile Street was an attractive market for subprime lenders: In 2005, 56 percent of Hispanic and 57 percent of black California homebuyers used subprime loans.

In December 2004, Ada Duque, a native of Mexico City and single mother of two who works in a printing plant, bought 927 W. Camile St. with two loans totaling $425,000 – 100 percent financing. She refinanced in January 2006 with a $460,000 subprime loan from American Mortgage ExpressFinancial. She said she pays about $2,500 a month.

Her loan is an example of the increasingly complex mortgages conceived by lenders involving low, interest-only initial payments that push the true cost of borrowing into the future. Fourteen homes on the block have mortgages with adjustable interest rates that can go as high as 11.75 percent.

Six homes received 100 percent financing – a 30-year first loan covering 80 percent of the value and a "piggyback" 15-year mortgage covering the other 20 percent. Seven home loans feature interest-only payments for up to five years, followed by balloon payments. Others let borrowers pick their monthly payment, while the principal, or total loan size, increases through a setup called negative amortization.

Property records show Duque's negative-amortization loan allows the principal to grow to up to $529,000 with an interest rate cap of 9.95 percent. That would raise her monthly mortgage to $4,800, nearly double her current payments.

Like many Camile homeowners, Duque said she shopped long and hard to find a house to buy but spent little time looking for financing. She said she never read the mortgage contracts because they were in English, which she doesn't speak fluently.

"There were so many papers, I just signed them," she said in Spanish.

Habit sinks in

Some property owners became serial refinancers, using their home as a piggy bank and digging themselves deep in debt.

In 2002, Hugo Guzman Roque and Patricia Noyola took out a $241,000 mortgage to buy the house at 1033, property records show. In 2003, they refinanced with Novastar Financial, in 2004 with Orange-based Argent Mortgage Co., in 2005 with Fremont Savings & Loan and finally in 2006 with People's Choice for $594,000.

Roque and Noyola are now desperate to sell, asking $600,000, down from $660,000 in March.

"That street is crazy," said their real estate agent, Jaime Ceballos of Santa Ana. "Everybody wants to move out."

Even seasoned real estate investors got caught. In August 2005, Greg Ovanesian paid $601,000 for a duplex at 1003 W. Camile St., one of seven investment properties he bought in Orange County. Ovanesian put down 10 percent and borrowed $541,000 from Countrywide. He planned to flip the property after a year. It took nearly two years before he sold it in late July for $709,000.

"I got out of a messy situation without losing money," said Ovanesian of Fountain Valley.

The only ones who seem content are longtime residents like Rafael Zambrano, who moved to 930 W. Camile St. in 1988. The chef and father of four said he has nearly paid off his $177,000 mortgage. He has a low opinion of the people who loaned money to his neighbors and the neighbors who borrowed beyond their means.

"I never sell. I never refinance," Zambrano said. "I don't take money out of my house to buy a car or take a vacation. I'm not stupid."

http://www.ocregister.com/news/loans-ca ... prime-loan