Subprime lenders reeling from burst

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At the height of subprime lending in Sonoma County, the industry leader was Long Beach Mortgage, a division of Washington Mutual in Seattle.

Long Beach Mortgage made 945 subprime loans in Sonoma County from 2004 through 2006, for $232 million. That was almost 14 percent of the market and well ahead of its closest competitor.

The No. 2 subprime lender in Sonoma County was New Century Mortgage Corp. of Irvine, which made 635 loans for $148 million.

Both companies closed this year, victims of the mortgage meltdown.

Long Beach Mortgage became the largest subprime lender in the county by having the most accommodating programs and years of lending experience, said Don Bunch, an account representative at Long Beach Mortgage from 2002 through 2004.

For example, Long Beach Mortgage let homeowners count money from renting out rooms as income, while some lenders did not, Bunch said.

“Mortgage brokers went to lenders who could get the deal done,” said Bunch, who has been a mortgage broker for 25 years, specializing in the subprime market for the past decade.

Long Beach Mortgage had an office on Fourth Street in Santa Rosa, next door to Washington Mutual, but it got all its business through independent mortgage brokers.

Bunch said his job as account rep for Long Beach was to make the rounds of brokers’ offices and sell subprime loans.

“We’d take a look at the loans they were working on, see if they fit our programs and show them the benefits of submitting the loan to my company instead of my competitors,” Bunch said. Today Bunch is co-owner of Affinity Mortgage, a Santa Rosa company that specializes in mobile and manufactured home loans.

Most Long Beach loans were sold to Wall Street investors. This resale market, which grew rapidly in the past decade, is a valuable tool for spreading risk. But it is also the key reason underwriting standards have weakened since the days when banks held onto all loans themselves and had a personal interest in making sure the borrower could repay.

Wall Street investors were eager to buy the high-rate loans because they were looking for investments that paid a nice return during a period of historically low interest rates. Long Beach’s average rates for its first-lien loans in 2005 and 2006 were 8 percent to 10 percent, compared to about 6 percent for a 30-year, fixed-rate loan.

Investors relied on rating agencies such as Moody’s Investors Service and Standard & Poor’s to accurately gauge the safety of the securities. In many cases, the agencies were wrong.

This year, both Long Beach Mortgage and New Century Mortgage closed as rising defaults caused nervous Wall Street investors to stop buying the high-rate loans. With the subprime market essentially dead since August, Washington Mutual absorbed the remnants of Long Beach Mortgage in September. New Century filed bankruptcy in April and is trying to reorganize.

“Nobody is buying those loans, hence nobody is going to make them,” said Bunch. After working at Long Beach Mortgage, he joined two other subprime lenders, BNC Mortgage and Clearpath Lending Solutions. Both have closed.

Sara Gaugl, a spokeswoman for Washington Mutual, said the company is trying in several ways to help customers hurt by the downturn, and it wants to avoid similar problems in the future.

It will refinance up to $2 billion in subprime loans for qualified borrowers. It will no longer make no-documentation loans or loans with initial fixed-rate terms of less than five years. It will require that each borrower represented by an independent mortgage broker have a chance to review key loan terms with a Washington Mutual representative. It will require that brokers use a simple, single-page disclosure form to explain their fees and the terms of the loan.

“We fully recognize that no party wins when a lender is forced to foreclose on a borrower,” Gaugl said.

Library researcher Teresa Meikle contributed to this report.