Bad Credit Mortgage Troubles Not Altogether Shocking

The disclosure by Irvine, Ca., based New Century Financial that its bank lenders were pulling its funding didn’t come as a shock to some mortgage lenders and bankers in California’s Coachella Valley.

After all, there’s long been talk in mortgage lending and financial circles about risks inherent with some adjustable-rate mortgages and other loan programs that have resulted in increased defaults and foreclosures.

Now, as the second-largest subprime (bad credit mortgage) company in the U.S. falters, there’s discussion that the federal government should take new steps to protect low-income homeowners at risk of foreclosing.

Some California home loan programs introduced by such subprime lenders were simply far too risky, said Jim McPhail, a mortgage finance specialist in Palm Desert, Calif.

“The (adjustable-rate mortgage) program was not really designed as a mainstream program,” said McPhail, who specializes in reverse mortgages. “It has come around, and it’s now biting them in the butt.”

News of the Irvine-based company’s plight has generated considerable talk locally among local financial executives and loan officers - particularly about wider-ranging ramifications for the bad credit home loan sector of the industry.

Buyers initially may have been able to get more home for their money using such “designer” mortgage programs, but such an adverse, long-term impact was pretty easy to predict, said Bill Powers, president of Pacific Western Bank.

“Whenever you do those types of loans, somebody has to pay the piper some day,” Powers said.

The issue at hand is the financial health of 11-year-old New Century and other independent loan originators that lend to bad credit mortgage loan borrowers - people with weak credit scores or high debt in relation to their personal incomes.

Many lenders loosen standards as home price appreciation soared. Borrowers, in turn, figured if they couldn’t keep up with payments there was always the option to sell their homes for a profit or apply for a home mortgage refinance in relatively little time.

But as defaults and foreclosures have jumped in California and nationwide, it’s becoming obvious that mortgage lenders will have to be more careful about sizing up loans that people can really qualify for, said Frank Montiforte, a loan officer with Four Seasons Mortgage Group.

“I like that word ‘tightening up’ - it’s the right thing to do,” Montiforte said.

SOURCE: The Desert Sun