Subprime loan effects hit Valley

The subprime mortgage market’s dramatic free fall is reverberating throughout the Valley as lenders tighten standards and would-be buyers watch in dismay as deals collapse without warning.

Gilbert real estate agent Tra Bell recently felt the ripple effect when his office had five deals unexpectedly fall apart.

Borrowers suddenly aren’t qualifying for loans they were already approved for because lenders are cutting programs, Bell said.

“The lenders are saying, ‘We can’t do it anymore in this type of a market,’” he said. “‘It’s not going to work. We’re losing our shirts.’”

Nationwide, mortgage firms are eliminating the use of 100 percent financing and statedincome loans, which don’t require borrowers to show proof of income, as well as requiring higher credit scores.

The stricter standards come as a rising number of subprime borrowers with

marred credit miss mortgage payments and fall into foreclosure.

Many took out exotic mortgages, which offer low teaser interest rates that later reset and balloon — squeezing already cash-strapped homeowners.

The default rates on these loans are higher than Wall Street investors, who buy them from lenders, are willing to tolerate, said Chris Mozilo, president of the Arizona Mortgage Lenders Association.

Investors are forcing mortgage companies to buy back hundreds of millions of dollars-worth of loans.

Lenders are also selling at deep discounts and taking huge losses, Mozilo said.“Some of them are on the verge of bankruptcy,” he said.

The fallout has left thousands of loan officers jobless and knocked many aspiring first-time home buyers out of the market. Now, lenders are taking away options and that “makes a tough market even tougher,” he said.

And it’s not just subprime borrowers who are feeling the crunch. If a first-time buyer loses his loan, then the seller can’t move-up to another house, said Yalda Alawi, an agent in Chandler.

It filters all the way up, said Alawi, who had two deals involving subprime loans fall through last week alone.Industry observers worry that the overall housing market could suffer with inventories increasing and prospective buyers being shut out.

But the long-term impact of the subprime downturn is unclear, said Jay Butler, director of Arizona State University’s Realty Studies department.

Much of it will hinge on external factors like the overall economy and gas prices, Butler said. Foreclosures will increase the number of homes on the market in Arizona, impacting home prices, said Mozilo.

The areas that will likely be hit the worst are those already hurting from dropping prices, such as outlying areas in Pinal County and the West Valley, Mozilo said. The local economy is still strong and people are moving here, though, he said.

And while some borrowers may be barred from the market, “the vast majority of people still do qualify,” he said.

Some borrowers who would be forced to overextend themselves financially shouldn’t be buying homes in the first place, said Jeff Broch with The Mortgage Advantage in Tempe.

About a month ago, his company created a “rescue team” to help salvage deals. The four-person group includes two loan officers, a title company agent and a real estate broker.

Guidelines are tightening, Broch said, but the firm is staying on top of changes and making successful deals.

The company recently helped Ramon Arroyo buy a new home in Queen Creek. Arroyo had hoped to buy two years ago, but his credit was a mess. So he continued to rent and steadily worked to improve his credit score.

Then this year, he decided to try again but still struggled to meet standards as he kept an eye on interest rates.

It was a discouraging process, Arroyo said, but after working with two separate lenders he eventually found a program that worked.

A first time home buyer at 54, Arroyo moved into a $225,000,four-bedroom house this month.“I could have been left behind,” he said. “I feel really comfortable and happy that I got my dream.”