Michigan Mortgage Lenders Suffer at Hands of Bad Credit Home Loans

The national meltdown of the subprime loan market is causing its share of Michigan mortgage casualities, as major lenders have closed and smaller ones are struggling with a lower volume of loans.

Bankers whose business is lending to those with weak credit are finding it harder to write loans to their clients and are stung by increasing numbers of defaults and foreclosures. Many have been forced to close shop.

Last year, one-time subprime lending leader Ameriquest Mortgage Co. closed 10 Michigan offices as part of a mass layoff of 3,800 employees, and Southfield-based Loan Giant went under after it engaged in improper practices such as submitting false data on applications.
Other national lenders who operate in Michigan, such as Countrywide Financial, are laying off workers in their subprime operations and writing down bad loans.

Industry experts say the businesses most affected locally are the small loan writers and brokers who sprang up during the home mortgage refinancing boom earlier this decade and are now closing in scores.

The mortgage lenders mostly dodging the bullet, including Quicken Loans/Rock Financial based in Livonia, are those that primarily sell mortgages to the most credit-worthy home buyers. Rock Financial, one of the bright spots in the state’s dim economy, says less than 2 percent of its loans are bad credit Michigan home loans.

“This is a major credit event caused by lax standards, unusually aggressive mortgage lenders and apparently some fraud,” said Dennis Capozza, a professor of finance at University of Michigan’s business school.

When the Michigan housing market is strong like it was five years ago and home prices are rising, people don’t often default on loans because they are able to sell their houses to get out from under a mortgage, Capozza said.

But now, he said, “we’re moving in the other direction. If you can’t sell your house, you may have to give it back to the lender.”

The result is more than 40 major lenders have gone under in the past 15 months and others, large and small, are struggling.

The victims are lenders whose business largely depends on subprime lending. Those lenders provide loans to borrowers with bad credit histories, low income or who can’t document their wages. Such loans often have low-introductory mortgage rates that jump after as little as a year. That, in part, is causing delinquencies and foreclosures to rise.

Such circumstances make subprime loans, which account for about 14 percent of all mortgages in Michigan, more risky for lenders.

Fewer loans written
The tightening of lending standards could mean that 10 percent fewer loans are written nationwide this year, said Bob Walters, chief economist at Livonia-based Quicken Loans/Rock Financial. “Even three or four weeks ago, people could have gotten a loan that they can’t get today,” he said.

The other problem dragging down lenders is defaults. Mortgage bankers often bundle their loans and sell them to financial institutions. If a loan defaults shortly after it’s written, it could be pushed back to the lender, leaving it with ownership of an empty house that’s declining in value.

“People that got in because the business was hot, as though money was growing on trees, are gone,” said Allan Daniels, president AA Mortgage Corp. in Bloomfield Hills. Much of Daniels’ business is writing subprime loans. “Who is left are the professionals - and that’s good for the business.”

Other loans also a problem
Daniels argues that subprime loans still have their place, particularly when they allow people with bruised or short credit histories to get into a home. Others say bad credit mortgages alone are not to blame for rising defaults and foreclosures.

“Regardless of their credit, some lenders were not putting clients into the right loans,” said Harry Glanz, co-founder of Southfield-based Capital Mortgage Funding. “Not all the loans that are going bad are subprime; some are interest-only, some are adjustable rate.”

With an interest-only mortgage, borrowers don’t pay any of the principal. That can cause problems when they look to sell and can’t recoup what they paid for the house. With adjustable-rate mortgages, subprime or not, borrowers often are unable to handle the payments when the interest rate rises after the introductory period.

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SOURCE: The Detroit News