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Arizona Subprime Loans Healthier than Most States

Arizona Subprime Loans Healthier than Most States

4/11/2008
by Chris Casacchia (Phoenix Business Journal)

While Arizona continues to log some of the highest foreclosure numbers in the nation, a new study shows the state’s subprime market is faring better than half the country.

According to statistics from the Federal Reserve Bank of New York, only 6.4 percent of the 80,541 Arizona subprime loans active in 2007 defaulted. Twenty-five states reported a higher foreclosure percentage among subprime borrowers than the Grand Canyon State. According to the report, the national average was 8.5 percent last year.

Florida led the country at the end of 2007, with 13 percent of its subprime loans in default, followed by Wisconsin (12.8 percent) and Ohio (12.3 percent). Alaska and Tennessee had the lowest percentage of defaults, both at 3.4 percent. Pennsylvania recorded the same percentage as Arizona.

Subprime loans — which tend to have higher adjustable interest rates — now are largely extinct, replaced by Federal Housing Authority options that are exempt from adjustments and add-ons.

FHA has been a promising program for people to refinance a home, said Bill Rogers, president and CEO of the Home­owners Financial Group. The Scottsdale mortgage brokerage has eliminated its subprime business, which once represented about 5 percent of its portfolio.

Rogers said his company receives calls every week from homeowners looking to salvage home equity or their credit, but some have very little equity, which limits their options. Plus, many of the original lenders and brokers are out of business.

Corporate greed and lax lending policies during the real estate boom spurred subprime loans and the mortgage meltdown, said Doug Reynolds, executive vice president and chief credit officer for Western National Bank in Phoenix.

Many borrowers overstated their earnings and received loans from banks that didn’t verify their income. The market was flooded with first-time home buyers, investors and speculators.

“People were treating real estate like the stock market,” said Reynolds. “People had no idea what they were doing.”

Now many borrowers are facing big loan obligations, while others wait for their adjustable-rate mortgages to kick in. The Fed estimates nearly 28,000 ARMs will reset this year in Arizona.

Reset ARMs can double mortgage payments in some cases, but given the Fed’s recent moves to lower interest rates, the situation isn’t as dire as some feared. Six-month (2.7 percent as of April 9) and 12-month (2.62 percent) London Interbank Offered Rates have been cut in half from a year ago, causing as much as one-third of mortgage payments to decrease this year, said Dean Wegner, mortgage originator at Phoenix-based Lion’s Gate Mortgage.

LIBOR is one of the most common benchmark interest rate indexes used to adjust ARMs.

Although the Phoenix real estate market still is seeing a high number of foreclosures and home prices plummet, the Valley is in a much better position than other cities, such as Sacramento, Calif.; Fort Lauderdale, Fla.; and Cleveland.

Many say growth is the reason. According to the U.S. Census Bureau, the Phoenix metro area posted the nation’s third-highest population increase last year, as more than 132,000 people moved to the Phoenix/Scottsdale/Mesa area. Dallas/Fort Worth saw an influx of 162,000 people, and Atlanta gained 151,000.

Many transplants come from more expensive markets such as California and Chicago and are willing to pay somewhat inflated prices on homes, which are much cheaper in Arizona than in those markets.

“We still have a lot of demand that’s supporting the marketplace,” said Philip Lechter, who co-founded Community First Financial LLC a year ago.

Keith Mishkin, president of Cambridge Properties in Phoenix, also is noticing more activity on the buy side, but said lenders are being incredibly conservative.

“Buyers who should get loans are having trouble,” Mishkin said. “The key is loosening up liquidity. As soon as that happens, we will see a dramatic improvement in the market.”

Inventory likely will get another boost this month. Maricopa County recorded 4,160 foreclosure filings in March, a

208 percent increase from the same time last year, according to Default Research.

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