In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Thursday, July 19, 2007

WaMu Staying Committed to Subprime

by Tanta on 7/19/2007 08:36:00 AM

There was some derision over this statement from WaMu in the comments yesterday:

In an interview, Chief Executive Kerry Killinger said that effective immediately, Seattle-based WaMu will require full documentation of income and assets from prospective subprime borrowers, eliminating riskier "stated income" loans.

WaMu will also no longer offer subprime adjustable-rate mortgages with initial fixed terms of fewer than five years. This eliminates so-called 2/28 and 3/27 loans, which carry low initial rates that jump to much higher, floating rates after two or three years. Stagnating home prices have left thousands of U.S. homeowners unable to refinance after rates reset higher.

The thrift will also require tax and insurance escrow accounts for all new subprime home loans.

"Too much money, and some would say, irrational money flooded the subprime market in the last couple of years," Killinger said. "This led underwriting standards to decline, credit spreads to narrow, and volumes to surge, and now has caused delinquencies to soar."

Killinger said WaMu has reduced subprime loan volume 70 percent, and is selling most subprime loans the thrift makes. Still, he said "we're absolutely committed to the subprime mortgage business. It serves a very important customer need."

I'll be honest with you: I hope that WaMu means that, and does stay committed to the subprime business. In my view, the biggest cause of the poison in the subprime market over the last few years has been that respectable regulated depositories have either shied away from the entire market, leaving it to the tender mercies of the envelope-pushers and predators, or have joined the envelope-pushers and predators in offering the toxic loan terms (stated high-LTV 2/28s with no escrows, for instance). To have a regulated player like WaMu announcing that it will stay in this market, but on much safer loan terms, means that there will come some needed stability to a much smaller but still functioning subprime mortgage market.

I have never, and do not now have, any objections to subprime mortgage lending as such. I don't object to bankruptcy laws, either: people do get into trouble and they do need to be able to start over. If the subprime mortgage market goes back to its original and best function of a mostly refi with some low-LTV purchase market that provides a way out of temporary debt problems or a way to re-establish credit for borrowers with past problems, I'll be happy to cheer it on.

I'll be even happier if the big depositories commit themselves to this, so that subprime borrowers have access to regulated lenders who are offering fairly-priced, fully-disclosed, conservatively-structured loans. That won't prevent non-regulated non-depositories from making subprime loans, but it will go a long way to forcing them to meet the standards of big players like WaMu. If the big depositories simply exit the business, the borrowers will simply be left to the sharks. Why would that be a good thing?