Free Press Article, March 26, 2007 Re: Subprime Loans

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Subprime loans rattle a shaky state housing market

Michigan's above-average reliance on risky subprime mortgages is inflaming the state's real-estate downturn and pushing it near the top of the list of states suffering mortgage delinquencies.

Wayne County saw the fourth-highest mortgage foreclosure rate in the nation in February, according to RealtyTrac, a real-estate service firm.


The problems weigh heavily on moderate-income homeowners who have subprime loans -- mortgages given to people with shaky credit histories. Subprime loans allow such buyers to own a home, but only at interest rates that can run several percentage points higher than a standard mortgage rate.

Michigan's bad economy makes matters worse for residents.

Angela Gavelis inherited her grandmother's house in southwest Detroit and in 2005 took out a $60,000 subprime mortgage at 8.5% to fix it up. But she wasn't able to find a job, fell behind in her payments, and her lender foreclosed last year. She filed for bankruptcy and is fighting the foreclosure.

"It needed a whole lot of work, a new boiler and everything, but they would not work with me when the payments started falling behind," she said Friday. "I just didn't count on the no-job situation."

In the past few years, subprime lending has soared as a percentage of all U.S. mortgages as lenders -- eager for income from mortgage-writing fees -- began to loosen their credit standards.

On the upside, this enabled many buyers to own a home for the first time. But in recent weeks, the rising volume of bad loans in the subprime market has shaken national credit markets and led to the failure of several lending organizations.

About 44,000 of the state's subprime loans -- or 21% of the total of 210,000 -- were delinquent at the end of last year. That was almost three times the state's overall mortgage delinquency rate, which itself ranked among the highest in the nation.

It also was well above the national delinquency rate for subprime loans of 13.3%, according to a survey released this month by the Mortgage Bankers Association, a national trade group.

"There's no question that Michigan is among the worst performing areas in the country, and it's not a surprise," Bob Walters, chief economist for Rock Financial, one of Michigan's biggest mortgage lenders, said last week. "It's completely related to our economic picture."

The human cost can be considerable.

"Unfortunately, the people that get taken advantage of by the subprime lenders are the most vulnerable. That's what's sad," said Walter Metzen, a Detroit bankruptcy attorney. "Most of the clients who have those subprime loans, they don't know what their interest rate is. They just don't understand it."

A blessing and a curse

One of Metzen's clients, a Detroit truck driver named Mario, who asked that only his first name be used, said his mortgage payment on his subprime loan started at $900 a month but jumped to $1,200 a month after an initial introductory period.

The interest rate on his subprime loan was 9% -- well above the current rate of about 6% for a 30-year, fixed-rate mortgage. He said he had kept up his payments until this winter, but fell behind when he couldn't find work.

"I'm happy to be in the house that I'm in. I think that my work status, the winter here, is what really got me in the pickle," he said.

Last year, almost one in every five mortgages in the United States was a subprime loan, about 20%. The rate in metro Detroit ran 26%, according to Loan Performance, a San Francisco firm that tracks mortgage data.

Subprime loans helped a lot of people buy a house. But often the buyers had trouble making payments, especially when their loans included provisions for escalating rates and higher monthly payments over time.

Across the full range of mortgage categories, from prime to subprime, Michigan ranked third worst among the states for delinquent mortgages in the final three months of 2006, with 7.87% of its mortgage loans past due. That ranked behind only hurricane-ravaged Mississippi (10.64%) and Louisiana (9.1%) for delinquency rates.

For loans foreclosed by lenders, Michigan also ranked third worst with a 2.39% foreclosure rate, behind only Ohio (3.38%) and Indiana (2.97%), according to the Mortgage Bankers survey.

Reining in subprime lending

Michigan's main mortgage lenders, which include Rock Financial and LaSalle Bank, the successor to the old Standard Federal, said they have not been hurt much by the rising delinquencies because they have not engaged in a lot of subprime lending. Walters said only 1.5% of Rock's loans have been subprime.

But subprime lending has been a mainstay of many mortgage brokerages, firms that originate loans but do not offer other banking services. Many of those firms, and the investment companies that bankrolled their loans, are now experiencing a wave of failures in national credit markets.

At 26%, metro Detroit's rate of subprime lending has run above the national average but is well below the peaks of 40% or more subprime loans in markets in California, Florida and elsewhere.

Metro Detroit's subprime share ranked below that of Jackson (31%) and Flint (30%) and was tied with the Lansing area, according to the Loan Performance data.

As a result of the problems in the lower end of the mortgage market, lenders have begun to tighten lending criteria. Some subprime borrowers who might have gotten a loan six months ago are now being shut out. In other cases, some lenders are requiring more money up front as a down payment. Others are requiring higher credit scores to give buyers the best mortgage rate.

"I see things tightening up across the board," Marshall Mandell, a broker with the Re/Max Classic office in Farmington Hills, said last week.

Walters agreed.

"Some loans were indeed bad for folks, but some were good, and now we get to work out the ramifications of going too far in certain cases."

Contact JOHN GALLAGHER at 313-222-5173 or


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