Bad Credit Home Loans Dominate Orange County Housing Market

Think corporate bankruptcies are the worst Orange County has to fear from the collapse of the bad credit mortgage lending industry?

Think again.

While just 21 percent of the county’s home purchase loans in 2005 were subprime – well below the statewide average of 26 percent – pockets of this California housing market are much more dependent on high-priced credit. In parts of Santa Ana, 75 percent of the money people borrowed to buy homes was subprime.

Subprime lending was also big in bedroom communities in the Inland Empire, where tens of thousands of Orange County workers live, and elsewhere in Southern California:

• In a single Moreno Valley tract, home buyers snapped up $297 million in subprime mortgages.
• In Adelanto they borrowed $271 million subprime, in one Fontana tract $130 million.

In a wide band stretching almost to downtown L.A. from the Los Angeles-Long Beach harbors, residents borrowed a staggering $2 billion from subprime lenders.

Each California mortgage loan examples were made in 2005, the latest year for which complete data is available, according to an analysis of federal data by The Orange County Register.

Most subprime loans are so-called 2/28 packages: They typically begin with a “teaser” rate for two years, and then escalate dramatically for the remaining 28-year life of the loan. Because of the potential for huge increases in these adjustable-rate mortgages, critics have called them “exploding ARMs.”

Most borrowers refinance after two years to avoid a “payment shock.”

Nearly 200,000 Southern California households took out subprime loans in 2005. A big chunk of them will need to refinance this year.

Before, subprime borrowers “had the market as (their) silent partner,” Aliso Viejo home mortgage broker Paul Scheper said. “They could refinance again. They always had the equity.”

Not this time.

“Now they’re kind of trapped” by stagnant home values, Scheper said. “They don’t have their silent partner anymore.”

And that means many of these borrowers may be facing foreclosure soon. That could create a problem for the community if foreclosures and forced sales drive down property values. Much of the region’s economy is based not only on rising property values but on residents’ ability to borrow against and spend some of their equity.

“This is the big dilemma,” said Paul Leonard, California director of the nonprofit Center for Responsible Lending. “What can be done to help current borrowers? They’re in [California home loans] that they probably should not have been in in the first place.”

Federal banking regulators have urged lenders to work with borrowers who can’t make their payments.

Leonard said that loan servicers, who buy loans from the originating subprime lenders, might lose more money conducting a foreclosure than they would from negotiating lower payments with current homeowners.

SOURCE: The Orange County Register