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Subprime in Oregon

This is a bit of a departure from my usual format as I normally don’t paste articles in their entirety but since this was emailed to me and all the sources are cited, here it is. Two different views of the risk to Portland real estate because of subprime issues. I searched Oregonlive.com for both articles with no result:

“Mortgage Meltdown: A subprime disaster area or use of subprime facts?
Gerard C.S. Mildner
Sunday Oregonian, August 12, 2007

Perhaps like me, you were alarmed by Angela Martin’s op-ed article about impending problems in Oregon’s housing market (“Subprime Disaster Heading for Oregon,” 8/5/2007). The alarm turns out to be misplaced, as there is no evidence that Oregon suffers any greater risk than the rest of the country of a housing market collapse due to subprime loans. In fact, borrowing and lending practices in Oregon are surprisingly conservative.

Subprime lending refers to mortgages issued to borrowers with low credit scores and hard-to-document incomes. Because of the increased risk of default, these borrowers are charged higher interest rates. They are often unable to afford traditional fixed rate mortgages and take out higher risk loans, including adjustable-rate loans, no-interest loans, teaser-rate loans, or payment option loans.

In her article, Martin, Director of the Economic Fairness Coalition of Our Oregon, argues that subprime lending in Oregon tripled between 2004 and 2005, that forecloses rose 23 percent in the last quarter, and that Oregon ranked seventh in the nation in negative amortizing loans. This is misleading.

The truth is that Oregon has one of the lowest rates of risky mortgages in the country. In a July 2006 report, the National Association of Realtors found that the Portland metropolitan area had about half the rate of subprime mortgages as the nation as a whole (5.7 percent vs. 10.1 percent) and a much smaller percentage of mortgages with loan to value exceeding 90% as the national average (7 percent vs. 16 percent). And in a September 2006 report, the Consumer Federation of America found that our rate of subprime refinancing was the lowest of any state.

In terms of delinquencies and foreclosures, there is no crisis in Oregon. According to the same National Association of Realtors’ study, the mortgage delinquency rate in Oregon is half the national average: 2 percent vs. 4 percent. Martin’s evidence for an “explosion” in foreclosures comes from a four sentence article in The Portland Business Journal, which in turn is a rehash of a press release by a Web site that promotes the selling of foreclosed homes.

Instead, a March 2007 report by a more credible source, the parent company of First American Title, finds that delinquency rates for prime mortgagees, subprime mortgages, and home equity lines in Oregon are some of the lowest in the country. And where delinquency did occur, the percentage loss to lenders was the lowest among the 50 states, again demonstrating conservative lending practices.

Having said that, there is evidence that Oregonians are high users of adjustable-rate mortgages and negative amortizing mortgages. According to the Realtors’ study, Portland area homeowners are more likely to take out adjustable mortgages than the nation as a whole, at 38 percent vs. 28 percent. And the First American study found Oregon had the fifth-highest adoption of negative amortization loans, at 9.1 percent vs. 7.3 percent nationally.

However, these borrowing practices reflect the high level of home equity experienced by most Oregon homeowners, as well as the high percentage of the elderly within the state. Given the cushion of the recent years of appreciation, many Oregonians feel comfortable taking equity out of their homes, whether to start a business, invest in financial assets, finance their child’s education, or use as income for retirement.

We should increase our efforts to educate consumers about the risks they take on with adjustable rate and interest only mortgages. However, we should also recognize that the creation of new types of mortgages has created significant homeownership and wealth-creation opportunities. People with less-than-perfect credit histories should not be barred from credit markets by ill-conceived policies. And we shouldn’t hype the problem with subprime mortgages by using unreliable and misleading information.

Gerard C.S. Mildner is the Director of the PSU Center for Real Estate and Associate Professor of Urban Studies and Planning at Portland State University.

24 Comments on “Subprime in Oregon

  1. I have no data speaking specifically to Portland, but I do have data speaking to Oregon.

    State of The Nation’s Housing Report Appendix W-9 – Affordability Product Market Shares by State

    http://tinyurl.com/2zc8yd

    The appendix states that 36% of loan products issued in Oregon in 2006 were either interest only (27%) or payment option (9%).

    Such a product mix doesn’t indicate a modicum of “conservative” lending practices occurring in this state. I think the low level of current foreclosures indicates the majority of resets have yet to occur and so I say the jury is still out.

  2. Subprime is old news. It’s already blown up. As PDX_Renter points out, there were definitely a lot of IO and Option ARMs in this market. And those are not subprime loans – those tend to be in the Alt-A space. Look at AHM – they want bankrupt a few weeks back. Prior to that they only did Alt-A and prime loans. Gee, I thought it was only subprime that was in trouble?

    This whole ‘it’s contained to subprime’ has been proven (especially in the last few weeks) to be a complete farce.

    No, the problem was the types of loans being made (IO, Option ARM, ARMs in general) and those may have been made to plenty of folks where were considered to be ‘prime’ borrowers. In fact the nickname for some of these like Option ARM and IO is ‘FICO Shredder’ – the borrower might be going in with a nice, decent FICO, but after a couple of years that very well may not be the case.

    So, whereas all of this did start showing up in subprime first, it definitely hasn’t stopped there.

    BTW: in the ominous events catagory: news came in today that a money market fund (Sentinel) was halting redemptions. A money market fund. Say that a few times and let it sink in. Not supposed to happen.

  3. Oh, I can’t resist:

    (from the posted article):
    We should increase our efforts to educate consumers about the risks they take on with adjustable rate and interest only mortgages. However, we should also recognize that the creation of new types of mortgages has created significant homeownership and wealth-creation opportunities. People with less-than-perfect credit histories should not be barred from credit markets by ill-conceived policies.

    But now we’re finding out how lending to people ‘with less-than-perfect credit histories’ and giving people bigger loans than they could really afford is having an impact on not only our national economy, but also the world economy.

    Just think about it: Would house prices be where they are now today if the 20% down had been required all along? No, I bet they’d be a whole lot lower. And that would mean that we wouldn’t be asking first-time buyers to risk insolvency by buying a home as we do now. It would also mean that the housing markets would still be sustainably healthy instead of first going through an unsustainable bubble followed by the crash of that bubble.

    And we shouldn’t hype the problem with subprime mortgages by using unreliable and misleading information.

    Right, like trying to say that the problems are only limited to subprime and saying that since we don’t have much subprime here there is no problem. This guy gets the Ostrich Award for today.

  4. If homes are appreciating, ARMs or Option ARMs will perform exactly as the borrower expected. If the reset prices the borrower out of the home, she can sell and walk with the equity.

    The only time an ARM is a trap is if housing prices falter. In that case, selling and/or refinancing is unavailable. So long as Portland housing keeps appreciating we will not have a glut of foreclosures, nor the commensurate fall in real estate prices.

    Portland home prices, year over year and month over month are still appreciating.

    It could be that with tighter lending standards would be first time home-buyers are less likely enter the market. How that would affect the Portland market is yet to play out. The effects will surely be localized (not many first-time home buyers in Ladds or the West Hills). Furthermore, even were the effects to trickle up (can’t purchase second home if you can’t sell first) current home owners benefitting from tremendous equity over the previous couple years could trade among themselves, or exit the market. Either way, the effect on Portland housing prices is unclear.

    Despite what he’ll tell you, TiP doesn’t know either.

  5. Yes, Oregon will magically escape the downturn that is going to decimate the rest of the country. I mean, it always has in the past! Oregon never has recessions or downturns! It’s the land of fantasy and goodness!

    Keep telling yourselves that.

  6. Hoopty: So please explain why inventories are so high right now and sales are off? Econ 101 seems predictive here.

    Naysayer: It can never happen here! Never. We’re just special. We just come from better stock. Immune from the temptation to speculate. Special place; everyone wants to move here. More moral fiber and all that.

    So basically, we’ve still got some folks in denial. People said exactly the same thing in places like San Diego, Phoenix, Florida, Las Vegas and others currently facing downturns about a year ago. Lots of people want (or wanted) to move to those places too. We don’t have a lock on in-migration here.

  7. If homes are appreciating, ARMs or Option ARMs will perform exactly as the borrower expected. If the reset prices the borrower out of the home, she can sell and walk with the equity.

    Oh, and Hoopty: That would be called a ‘gamble’. A gamble that didn’t pay off for a lot of folks.

  8. “Two different views of the risk to Portland real estate because of subprime issues.”

    Professor Mildner presents one side. Could you post the other article?

  9. JP, I looked for the article and couldn’t find it. If anyone can find it, I will post it (“Subprime Disaster Heading for Oregon,” 8/5/2007).

  10. Didn’t pay off? Do you even live in Portland? Anyone who purchased more than three months ago has plenty of cushion. If you purchased more than two years ago, you’re sitting on a fantastic pile of equity. Portland has a lot of cushion. We’ve a long way before foreclosures become an issue.

    Like I said above, the credit squeeze, if prolonged, could trickle up, but it’s difficult to see how that will play out.

  11. “If homes are appreciating, ARMs or Option ARMs will perform exactly as the borrower expected. If the reset prices the borrower out of the home, she can sell and walk with the equity.

    The only time an ARM is a trap is if housing prices falter.”

    The same could be said for the tulip bubble, the South Sea bubble, and the internet bubble. It’s even true for a pyramid scheme. In fact, you have pointed out exactly why those schemes work for a while, but eventually always crash.

  12. Didn’t pay off? Do you even live in Portland? Anyone who purchased more than three months ago has plenty of cushion. If you purchased more than two years ago, you’re sitting on a fantastic pile of equity

    Yep, you’re sitting on a goldmine!

    Of course there’s that little problem of actually going through the selling process… It can, well, kind of, you know, take a while these days from what I hear. Just a little rough patch. I’m sure things’ll pick up in the Fall. You can bet on it! People will be taking out those Option ARMs with no money down again in no time.

    Portland has a lot of cushion.

    It sure does! Everything is swell here. Even the homeless people are rich. I say we give’em all home loans – that’ll fix two problems at once.

    Like I said above, the credit squeeze, if prolonged, could trickle up, but it’s difficult to see how that will play out.

    Oh Hoopty, I’m sure it’ll all just be peachy. Nothing bad ever happens here! Not in good old Portland, OR! Jeepers, this has got to be the happiest place in the whole wide world!

    [cue the Rogers and Hammerstein music]

  13. Or maybe that should be: give the homeless home loans so they can get rich. All they’d have to do would be to wait it out for a few months and then sell and they’d get a huge windfall. It’d be so quick that the lender wouldn’t even mind much that they didn’t get any payments. Sounds like the solution to poverty.

  14. This pejorative exchange is ruining your blog Charles. Thanks for producing good material, but some of those commenting reduce any exchange to baseless derision. You would do well to censor.

    For a good example of encouraging substantive exchange without suffering the trash, see bojack.org.

  15. Hoopty:

    You can look at what’s happening to the credit markets and what is about to happen to the economy and still think that the real estate industry and its cheerleaders don’t deserve criticism? Hardly baseless.

    Maybe when we’re all living in boxes the RE agents can start selling them.

  16. Hoopty:

    Been on the internet long? This is very, very tame.

    You did label me an ‘alarmist’ BTW, and I didn’t call for censorship.

    To some of us your post prior to the last one sounded, well, to be honest, I think Pollyanna would be the word. And, I suppose that made it an easy target. But if you think we’re being a bit too mean to you then post some facts to counter our arguments – that’s what the internet is all about. Dialog – OK, spirited debate in many cases, is what it’s all about. Calls for censorship only indicate that you’re not up for it.

  17. Hoopty,

    Jack would laugh you out of his blog.

    It seems that you are not aware that the NAR’s asking price data for Portland shows negative appreciation YOY.

    http://www.housingtracker.net/askingprices/Oregon/Portland-Vancouver-Beaverton/

    Note: This site uses US Census Metropolitan Statistical Areas to ensure that a representative sampling of properties is provided.

    Regardless of how the market does, many of those ARMS and option ARMS are doomed. The secondary market and the mortgage broker are dead. No credible bank will allow those poor financial marks to refinance.

    Moreover, the link PDX renter provided clearly shows that the rate of subprime loans in Portland is roughly equivalent to San Diego. Given the lack of a real economy in PDX, its not a leap to predict that the credit bubble will hit portland very hard.

    Although I have the money and credit to buy a house, I prefer to short the real estate industry. Given my current annualized appreciation, I might soon be able to buy your house outright, Hoopty.

    Have a nice day.

  18. I’ve made a point not to censor. I don’t know how I would draw the line. People that don’t agree with me? There would be very little left. I have not been above the “spirited debate” and have previously asked for some of the name calling (okay, it was directed at me then) to be cleaned up. It was so we move forward.

    We don’t all have to agree. My read thus far on the subject is that subprime is mostly toast. This will make it harder for many buyers and shrink the market which is/will affect prices. What our magic 8 ball can’t tell us is how much trouble we are in. How much does the Portland market lag behind the national? Does it? My speculation (anything on the topic is) was middle single digit appreciation for 2007. 4-5% may even be high now (RMLS Market Action should be out in a couple of days so we can revisit this. I don’t see but some do double digit drops in the future. Once you decide where you sit on the fence you can make an educated decision about whether real estate, stocks or betting on basket ball is better for you.

  19. I prefer to short the real estate industry.

    SE_Renter: I got into SRS (an ETF that shorts Real Estate/Housing/lenders) a few weeks back and I’m already up more than 20% on that – of course, let’s not repeat the mistake of counting gains before they’re sold 😉

    Charles: You’re sounding very realistic at this point. Not that you weren’t before, but just more so now 😉

    As far as double-digit drops go: it’s gonna take at least a few years for the complete drop, but I do think we will see a double-digit drop spread over the next 3 or so years. The current storm in the credit markets is one of those 5 or maybe 6-sigma events meaning the statisticians gave it a very, very, very low probability of happening in anyone’s lifetime. Oh, and looks like the carry trade is unwinding now. The US$/Japanese Yen ratio has just now gone under 114 – it was 118.5 yesterday. The carry trade, where speculators borrowed Yen at very cheap rates and used that leverage to invest in stocks or just to get high rates of return from banks in New Zealand, was a major source of liquidity in world markets. The unwinding of the carry trade has been predicted by lots of folks from bloggers to The Economist Magazine with potential for dire consequences for the world economy. I think it’s safe to say now that we have the perfect storm.

    Batton down the hatches and Good luck.

  20. Charles, I did not see double digit drops in the future either. Now…not so sure.

    TiP,
    I moved heavily into SRS last month (!). My SDK calls and CFC puts have done well too.

  21. I think the past few days have demonstrated that the local statistics on subprime usage and delinquencies are largely irrelevant.

    Subprime has collapsed on the finance side. No one is willing to make the loans anymore, regardless of what the local statistics are. Alt-A and Jumbo loans are following suit. The Wall St. investors don’t care that “all real estate is local.”

    With subprime, Alt-A and Jumbo loans gone, you don’t even need foreclosures to drive market prices down. Even with a $100k downpayment, a non-Jumbo loan will limit you to $517k. That’s a one-bedroom apartment in the Pearl District. I’m willing to bet you that most buyers shopping for one-bedroom apartments do not have $100K to spend on a downpayment. If you thought demand was low last week (take a look at the slow pre-sales in the Wyatt and the Encore), you haven’t seen anything yet!

  22. I heard on NPR last night that investigations have shown that over half of the folks who applied for ‘stated-income’ loans overstated their income by at least 60%…

    Is there any wonder that we’ve got a problem now? The temptation to cheat to be able to get into more home than people could afford was so high that more than half the people did it. The perceived pay-off was (supposedly) that the house would go up so much in a couple of years that the applicant would be ‘rich’.

    No wonder nobody on Wall St. wants to touch mortgage backed securities (MBS) at this point.

  23. Wall Street WANTED more people to take out risky loans. The CDOs the created from high risk netted them the most profit when they sold them to investors.

    Go to Salon.com and read “Panic on Wall Street”.

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