voiceofsandiego.org’s own Kelly Bennett has a must-read story today on the impact of recent crack downs on subprime mortgages and so-called exotic loans that require zero money down and/or zero documentation of income.

Bennett’s comprehensive reporting even gets some in the real estate industry to admit that the situation may be getting worse for their business. Here’s an excerpt:

David Cabot, president of the San Diego Association of Realtors, said he hasn’t seen any concrete evidence of a direct impact of the subprime news in San Diego.

But he said he disagrees with those stricter regulations on loans that used to allow consumers to get a mortgage on the knowledge, or assumption, that their incomes would increase by the time the payments increased. He said the local market, which has slowed since the years of double-digit appreciation at the start of the decade, could be hurt by strict loan regulations.

“Anytime you substantially remove a big chunk like that from the market, it’s going to have an impact,” he said.

And the impact is not just on buyers, but on those agents who help them find a home to buy. Jim Klinge, a Realtor in North County, has monitored the numbers of 100-percent financing and subprime loans for a couple of North County cities on his blog, and says the overwhelming majority of 100-percent financed loans for Oceanside homes were in the $230,000 to $450,000 range — the range for first-time home buyers usually, he said.

“There are some (Realtors) who handle nobody but first-timers,” Klinge said. “They’re going to be out of business.”

And mortgage brokers are worried about their jobs, too, said David Maiolo of Ocean Mortgage. Maiolo said some subprime lenders have taken a break this week, where they don’t allow submissions of new loans while they sort out what their new regulations will look like. And while the lenders sort that out, the brokers worry about what tighter regulations would mean for their client pool, and ultimately, for their jobs.”

Bennett’s reporting suggests that the stricter lending regulations being set by Freddie Mac, which is considered a policy leader in the industry, may be the trigger that realtors, buyers and sellers have been waiting for. The trigger that will push prices way down. During the boom years, and until now, middle class and upper middle class buyers have used no-doc, zero down and subprime loans to reach beyond their budget allowances for a more expensive mortgage.

If these tools are taken away, how many people can realistically buy one of the $700,000 to $1 million-plus homes I routinely see in my neighborhood?

If you move this analysis inland and away from Point Loma with its expensive water views and coastal breezes, you still have a problem in neighborhoods like La Mesa or Tierrasanta, which are surprisingly not that much less expensive than Point Loma.

If you take away easy lending, how many people would qualify for one of the three-bedroom homes priced in these neighborhoods from the high $400,000s to $1 million? (Actually, I could not find a single family home in La Mesa priced below $550,000, though there were a few in Tierrasanta.)

The answer to the question is not many, considering San Diego’s $62,000 median income. Only 9.4 percent of San Diego household’s earn more than $150,000 annually, according to 2005 Census Bureau figures.

Freddie Mac’s new rules require an income of more than $160,000 annually to qualify for a $472,000 mortgage.

If very few buyers qualify for a mortgage at the median price, much less one over $700,000, it only makes sense that sellers will have to adjust their prices.

The conventional wisdom is that sellers will just take their homes off their market and rent the homes out or stay put, but that only works if the seller really doesn’t have to sell and we don’t know how many of sellers have that option. Surely, there are sellers in this market who must sell. Not everyone can afford to wait it out, particularly if they are among the set of people who overpaid for their homes at the peak of the market.

Bennett reports on the implications of Freddie Mac’s new rules:

Those rules mean it’s going to get a lot tougher for those with poor credit to buy a home. Before the rule change, a borrower hoping to buy a median-priced, $472,000 home could qualify for an initial monthly payment of $3,628 on a subprime, two-year, adjustable-rate mortgage at 8.5 percent.

Now, under the new Freddie Mac rules, that borrower has to qualify also at the fully-indexed, higher payment of $5,405 monthly, according to Mark Carrington, who compiles data for First American Loan Performance.

Assuming that the borrower needs to prove that those payments represent only 40 percent of his or her income, the borrower would need to earn more than $160,000 annually to qualify for the loan. Under the earlier rules, the borrower would have had to earn nearly $110,000.

Keep in mind that the 40 percent figure cited in Bennett’s story is more than financial experts recommend people spend on housing. The standard for financial management is that you should spend no more than 30 percent of your income on housing, including taxes and utilities. So even with an income above $160,000, this buyer would still be reaching to afford a median-priced home, which a quick search of available resale homes indicates wouldn’t be much.

I use the term “worker housing” in this space a lot and that’s because whenever I see overpriced worker housing, which is a lot, I’m always struck with one question. “Who is buying this house?”

You know worker housing when you see it. It’s a box with no particular architectural distinctions — not even the Craftsman brand to give it cachet — just a box with a few windows, two to three bedrooms and, often, poor natural light.

I see homes that fit this description in Point Loma priced above $700,000. I have to assume that anyone with that kind of money to spend on a mortgage is going to have certain lifestyle expectations that worker housing just can’t fulfill. The only exception to that assumption is an investor taking advantage of wildly appreciating housing market, which no longer exists here. Am I wrong?


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