I’m trying not to harp unnecessarily on this subprime thing — the news that lenders are pulling back or eliminating loans to customers with less-than-stellar credit.

But a lot of big media players have been adding coverage of subprime slump recently and a couple of recent reports had really significant tidbits to add to the conversation. Some analysts are saying these increased regulations could be the shock that extends the slump in many of the nation’s housing markets, and San Diegans have not been strangers to these loans.

This one, from the Christian Science Monitor on Friday, quoted Mark Zandi, a well-respected economist from Moody’s Economy.com who often chimes in on housing market forecasts:

Across the nation, foreclosures and defaults are rising as mortgages that were once affordable are now expensive albatrosses as the introductory “teaser rates” that made the loan possible end and higher interest rates kick in. Some housing specialists worry that the mortgage industry — with more than 20 companies already in bankruptcy — will raise its lending standards so high that would-be homeowners with less-than-perfect credit will be frozen out. There is even some concern that the pullback in lending will extend the slump in the nation’s housing market.

“It’s the most serious threat to the economy,” says Mark Zandi of Moody’s Economy.com. “It has the potential to set the housing market back another big notch since there could be a whole class of people who can’t get credit.”

Not only will lenders’ tightened standards bar a lot of homeowners from refinancing, thus potentially sending their homes into foreclosure, but it will dramatically reduce the number of people able to get a mortgage and buy a home.

That, in turn, will probably continue to slow down San Diego’s housing market, where houses have become so expensive that the only way into the market for many buyers was through a subprime loan for 100 percent of the purchase price of the home.

Jim Klinge, a North County Realtor, posted some data on his blog this morning showing significant percentages of home purchases in Carlsbad and Oceanside made with 100-percent financing in January and February. And most of those sales were subprime, he said:

  • In January, 19 percent of the homes sold in Carlsbad and 48 percent of the homes sold in Oceanside were mortgaged with 100 percent financing.
  • In February, 26 percent of the homes sold in Carlsbad and 40 percent of the homes sold in Oceanside were 100-percent loans.

And this story in today’s USA Today included some extrapolation on Freddie Mac’s announcement last week that the mortgage giant would ramp up its regulation for subprime borrowers:

It’s too soon to know how many buyers won’t qualify under the tighter criteria and how the trend will hamper this year’s expected housing recovery. “It’s a tough situation,” says Dick Syron, CEO of Freddie Mac.

Under Freddie’s new rules: If a subprime borrower wanted to buy the U.S. median-price home at $210,600 with a two-year ARM, the buyer would have to qualify not only at the starting monthly payment of $1,619, at 8.5%, but also at the maximum payment of $2,412 a month, at 13.5%.

“There’s a very delicate and difficult balance between getting as many people into houses as you can,” Syron says, “and at the same time putting people into houses they can’t keep unless home prices are appreciating or interest rates are very low.”


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