Local impact of home-loan investigation will be long-term
Locally, impacts may vary from those on the mainland. Financial institutions said that while they are not expecting an increase in home foreclosures, West Hawaii residents with tarnished credit histories may have a more difficult time finding a lender to finance their homes.
Subprime borrowers will now need to have down payments, whereas in the past, someone with tarnished credit could receive 100 percent financing through a subprime lender, said John Todd, owner of Keauhou Mortgage Company LLC, which consists of up to 40 percent of subprime loans.
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While about 90 percent of the mortgage market is "traditional" mortgages through financial institutions -- such as First Hawaiian Bank, Hawaii Community Federal Credit Union and the like -- about 8 percent falls into the subprime lending market, said Dr. David Hammes, an economist at the University of Hawaii at Hilo, College of Business and Economics.
This market gives borrowers who do not have perfect credit history an opportunity to qualify for a loan and purchase a home. The most popular loan for subprime borrowers gives a "fairly low" fixed interest rate for two or three years, then upon expiration, it jumps to a six-month adjustable rate mortgage, said Tom O'Leary, president and owner of Western Pacific Mortgage, whose business consists of up to 15 percent of subprime loans.
"Generally, borrowers apply for this loan thinking they will fix their credit and refinance when their two or three years is up, but that doesn't happen and they are not prepared for the jump in their monthly mortgage payment," O'Leary said.
For instance, if someone borrowed $300,000 for two years at 7.4 percent, the monthly payment would be $2,077. At the end of the two years, the interest rate would jump to 8.9 percent and the payment would be $2,380; at the end of that six-month period, the interest would jump to 10.4 percent and the payment would be $2,694; and so on. Over the course of the loan, the interest could increase from 7.4 percent to 14.4 percent, O'Leary said.
Neither mortgage company had heard of its borrowers falling delinquent on their payments, and both said the only impact they have seen in Hawaii to date has been the tightening of guidelines for subprime borrowers. However, Todd said several mortgage companies are becoming "more picky" on second mortgages as well.
"I've not seen an increase in delinquent payments because of subprime lending," said Joy Cabildo, senior vice president of First Hawaiian Bank's residential real estate division. "By nature, people in Hawaii just tend to be better payers. (Vast foreclosures) are not something we should be really concerned with. However, it is the people who are living on the fringe (financially) who may not be able to find a lender -- that is where you're going to see (the impacts) more."
A concern for Michael Asam, president and chief executive officer of Hawaii Community Federal Credit Union, is if area homeowners do begin to default on their payments and homes are foreclosed on, there will be a large supply of these homes on the market.
"So we could start to see the housing prices going down, which would be a good thing for consumers, but not for lenders," Asam said. "It would be bad for us because we have loans on the books that are based on the previous housing market (with higher appraisals). There's a lot of things to consider at this point. We're not sure where it's going from here."
That appears to be the question nationwide, with investors leery of investing after the Dow Jones' plummeting spiral and fear it will affect more stable parts of the economy.
"The number one question now is what is driving the increase in defaults (delinquent loan payments)," Hammes said. "Was there a job loss, a decrease in salary, the homeowner just couldn't afford the payment -- or is this indicative of a rising recession? Overall, the aggregate numbers for the economy still shows it being strong, but there's an increase in uncertainty."
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davido wrote on Mar 15, 2007 6:18 PM: