WAMU: slash subprime loans 70 percent this year

Washington Mutual Inc. said it is making fewer subprime mortgages and emphasizing higher-quality loans to boost earnings and cut risk after its home loans unit lost $113 million from January to March.

The largest U.S. savings and loan said Friday it is also significantly reducing loans that require little documentation of borrowers' income or assets and second mortgages that let borrowers buy homes with little or no money down.

It is making the changes amid an industrywide increase in defaults and foreclosures at a time that home prices are stalling and homeowners find it tougher to refinance as interest rates adjust higher.

"We've completely changed the culture from a volume-based culture to a quality-based culture,"

The home loan loss caused WaMu's first-quarter profit to drop 20 percent to $784 million, despite higher earnings in its retail banking, credit card and commercial banking units. Overall home loan volume fell 34 percent to $29.6 billion.

Beck said WaMu has reduced "piggyback" second mortgages and "stated-income" loans, sometimes called "liar" loans, because they require little documentation and can lead to fraud.

He also said "we no longer do" combination loans, in which principal equals 100 percent of properties' value.

WaMu expects to slash subprime loans 70 percent this year to $8 billion from last year's $27 billion. On April 18, it pledged to refinance up to $2 billion of subprime loans at below-market rates to help borrowers who might otherwise miss payments. Subprime loans are to borrowers with poor credit histories.

The thrift also expects to boost "Alt-A," or "Alternative-A," lending, which falls between prime and subprime in quality. First-quarter Alt-A loans rose 49 percent to $7.6 billion from $5.1 billion, the thrift said.

Other lenders that tightened loan standards this year include Citigroup Inc , Countrywide Financial Corp , IndyMac Bancorp Inc . and Wells Fargo & Co .

WaMu shares are down 7 percent this year.

Marin County: Looking good

Economist sees Marin holding its own in housing slump
Gary Klien
Marin IJ Newspaper 04/10/2007 06:24:04 PM PDT

A prominent real-estate economist predicts that troubles will persist in the California housing sector throughout the year, but she said Marin's unique market is weathering the downturn better than other areas.
"It's God's country, what can I say," Leslie Appleton-Young, chief economist for the California Association of Realtors, told an audience of agents Tuesday in Terra Linda. "When is the 30 percent decline in Marin County's market going to happen? Not in my lifetime."

Appleton-Young, appearing before a regular meeting of the Marin Association of Realtors at the Four Points Sheraton, delivered a mixed message of optimism and wariness about the housing sector. The Marin Association of Realtors recently launched a public relations blitz, promoting their message of a healthy market to Rotary Clubs, chambers of commerce, public officials and community groups.

Appleton-Young, while expecting a continuing contraction through 2007, said the brunt will be borne by the inland markets of Southern California, the Central Valley and areas north of Sacramento. In those areas, she said, agents are coping with a growing inventory of unsold homes because of new construction in the suburbs and rising foreclosures on strapped lenders with riskier subprime mortgages, she said.
The Bay Area is facing many of the same challenges, but to lesser degrees, she said. According to the California Association of Realtors:

- Some 138 detached homes were sold in Marin in February, up 47 percent from February 2006. Statewide, sales were down 9.6 percent over the same period.

- The median price of a detached home in Marin was $963,414 in February, up 1.9 percent from the previous February. Statewide, the median increased 5.7 percent over the same period, but the price, $564,700, was considerably lower than Marin's.

- Marin had an unsold inventory index - the number of months needed to deplete the supply of detached homes on the market at the current sales rate - of 1.1 months in February. That compares with 2.8 months in the Bay Area and 8.8 months statewide.

"You have, like, no inventory compared to Southern California," Appleton-Young said. "And Southern California's inventory is moderate compared to the Central Valley.

"It's important to keep it in perspective. Do you really know anyone who thinks, 'Gee, I'm so sorry I bought in the Marin market?'"

According to the most recent report from DataQuick Information Systems, a La Jolla-based research firm, sales of detached homes in Marin rose 25 percent - from 134 to 167 - between February 2006 and February 2007. The median price for a detached home rose in Marin half a percent, to $925,000, over that period.

Appleton-Young said California's housing sector will continue to suffer for some time from a wave of foreclosures on homeowners with subprime loans. But she said the areas most affected will be inland areas, where many residents bought new homes with zero down payment loans during the price peak of 2005-06, only to see values plummet.

According to the Mortgage Bankers Association, the percentage of subprime loans in the California market has risen from 5 percent to 15 percent since 2003.

"People are paying a much larger share of their income to pay their mortgage," Appleton-Young said. "It made sense when your return was 15 percent."

College of Marin real estate instructor Corina Rollins, who was not at the event Tuesday, said she agrees that Marin is somewhat more insulated than other areas because the housing sector is taking its biggest hit at the lower end of the market - where first-time investors and speculative investors roam. Rollins said she has seen an uptick in foreclosures in Marin, but they tend not to be for homes in the upper range.

"When you look at it, it's a very limited section of the market," said Rollins, a Greenbrae appraiser. "It's all the bottom of the market, which, goofily, is $400,000 to $600,000."

Marin's foreclosure activity, while not increasing as dramatically as in other counties, nearly doubled in the fourth quarter of last year. According to DataQuick, 101 notices of mortgage default - the first step in the foreclosure process - were issued in Marin County in the fourth quarter of 2006, up 98 percent from the last quarter of 2005.

By comparison, notices of default were up 134 percent in the nine-county Bay Area over the same period, DataQuick reported. Statewide, default notices increased 145 percent year-over-year. In Merced, Placer and Santa Barbara counties, the increase exceeded 250 percent.

But recent foreclosure activity has apparently been brisk in Marin. According to the new Foreclosure Center at Yahoo.com, dozens of foreclosures have been listed in Marin in the past two weeks alone, including six in Novato; four in San Rafael; three in San Anselmo; two each in Marin City, Mill Valley, Corte Madera and Kentfield/Greenbrae; and one each in Sausalito and Fairfax.

Despite the problems in the housing sector, Appleton-Young noted that the economy is growing at a moderate pace, interest rates are relatively low and job creation has been steady in California. Also, the commercial real estate market has been "on fire," suggesting brisk job growth and investment, she said.

"It doesn't look like there's a recession coming any time soon," she said.

Local real estate agents said they were encouraged by Appleton-Young's talk.

"I think there's a lack of inventory and a lot of qualified buyers," said Marilee Brand of Coldwell Banker in Greenbrae. "But they have to feel like they're getting value for the dollar."

Vicki Buckle-Clark, an agent with Pacific Union in Greenbrae, described the market as "extremely unique."

"We can't be lumped together with all the California statistics and the nationwide statistics," she said.

East Bay Housing: worst hit epicenters

The East Bay has become one of the worst-hit epicenters jolted by the housing slump, and the aftermath is likely to slow the region's surging economy and job market, according to a report released today 4-1.

Some of the sharpest spikes in home mortgage defaults in California have surfaced in the East Bay, a study by the University of California, Los Angeles, Anderson Forecast disclosed.

The South Bay and San Mateo County areas also showed a big jump in notices of default, which are filed against home-owners who have fallen behind by about 90 days on their mortgage payments. Those default notices eventually can lead to a lender seizing the house to satisfy the delinquent loan.

"The East Bay is definitely the place where the defaults have risen the most in the Bay Area," said Ryan Ratcliff, an economist with the Anderson Forecast. "It is not quite as bad as the areas surrounding Sacramento, but the defaults are up a great deal." The unsettling outlook was fresh evidence that the ailments that have afflicted the fading housing market have yet to run their course.

"We think this is just the beginning of the default problems," said Edward Leamer, director of the Anderson Forecast. "It really was not until recently that you began to see evidence of the defaults."

However, he cautioned that the numbers might eventually look not too terrible. Karevoll said the current default rates are up from levels of a year ago that were "unnaturally low."

As housing continues to struggle, the big question that analysts hope to answer is whether the real estate downturn could infect the broader job market and economy. The Anderson forecasters believe the housing woes are not severe enough to trigger a recession in California or the nation.

"What happens in housing, stays in housing," Leamer said. "This time, the problems will be restricted primarily to the housing sector."

Still, the weakness in housing will trigger at least some sort of ripple effect in the regions that are hardest hit by the skyrocketing defaults, the Anderson economist said.

"Real estate is enough of a drag to make the economy more sluggish," Ratcliff said. "You have the impact of less home building and less selling of houses. That has a drag on the overall economy."

For example, in February 2006, residential building construction in the East Bay was growing at a rate of 1,000 jobs per year. But by February 2007, that home-building industry lost 600 jobs in a year. Similarly, the real estate sector in February 2006 grew at a rate of 300 jobs a year. In February 2007, real estate lost 600 jobs over a one-year period.

Some analysts believe construction could still hold up despite the housing slump. That's because people who have lost jobs in home building might find employment in other construction arenas, according to Greg Feere, chief executive officer of the Contra Costa County Building and Construction Trades Council.

"The forecasts for construction in the commercial and industrial sector is extremely strong and is going to get stronger," Feere said. "Even though we have the downturn in the residential market, the other sectors will offset it."

Case in point: In February 2007, while residential construction was losing 600 jobs in one year, nonresidential construction gained 500 jobs over the same 12 months and heavy and civil engineering construction gained 500 jobs, a state labor report showed.

Despite the hopeful signs, the housing woes seem particularly acute in the East Bay. The Anderson researchers compared mortgage delinquencies in the fourth quarter of 2006 with the fourth quarter of 2005. The economists found that over the one-year period, Alameda and Contra Costa counties were much harder hit by home-loan defaults than most of the California markets they surveyed:

-Defaults in Alameda County rose 157 percent.

-Defaults in Contra Costa County were up 179 percent.

-Defaults in Santa Clara County were up about 75 percent.

-Defaults in San Mateo County jumped around 95 percent.

Yolo, El Dorado, Placer, Riverside and Ventura counties were the only regions surveyed by Anderson that suffered bigger spikes in notice of default filings than Contra Costa, the forecast found.

It's unclear whether the housing slump will linger or might soon end.

And some home owners who have seen their equity vanish as home prices slump at the same time their mortgage payments have turned more costly may have much to ponder in the coming months.

"There will be a lot of hard calculations by people whose income has been stretched," Leamer said. "They will have to decide if they are going to walk away from their homes."

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