Behind the meltdown: No-proof loans fed mortgage bubble

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Interactive graphic: Subprime loans by community

A TIMELINE: HOW LOAN STANDARDS HAVE CHANGED

2000-2002
Seven years ago, the traditional patterns of mortgage lending dominated. Nearly 80 percent of mortgages in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties were fixed-rate loans where the monthly payment stayed the same for 15, 20 or 30 years. Lenders asked for pay stubs or W2 forms to verify incomes.

2003-2004
The lowest mortgage interest rates in years triggered a home-buying binge in Sacramento, driving up prices. The combination of low interest rates and higher prices started a stampede into riskier adjustable rate mortgages that came with lower initial monthly payments. In 2003, nearly one-third of area homebuyers and people refinancing their homes used adjustable-rate loans. In 2004, two-thirds used them.

As prices rose in 2004, subprime lending – higher-cost loans to people with troubled credit histories – reached its peak. In 2004, 28 percent of borrowers in El Dorado, Placer, Sacramento and Yolo counties received riskier subprime loans. Subprime totaled 36 percent of 2004 loans in Sutter and Yuba counties.

2005-2006
As prices rose, 73 percent of capital-area borrowers turned in 2005 to adjustable-rate loans, many with low "teaser" rates that would reset in two or three years. Lenders told many not to worry – they could refinance before then.

As global investors pushed capital into the U.S. home market and broker fees soared for the riskiest loans, standards relaxed significantly. More lenders turned to "stated income" loans that didn't verify borrowers' financial situations and often required no down payments. In 2005, 35.5 percent of California's first-time homebuyers made no down payments; the next year it jumped to 41 percent. In late 2005 home prices peaked, then fell throughout 2006. Many new borrowers found they couldn't refinance because they owed more than their houses were worth. Defaults mounted, starting a run of foreclosures.

2007
A dramatic rise in defaults by subprime buyers caused several big lenders to implode. Global investors stopped supplying capital for new loans, bringing a massive credit crunch. Almost overnight, mortgage experts say, an estimated 30 percent of the Sacramento region's buyer market dried up as new tighter mortgage lending standards blocked would-be borrowers. Stated-income loans almost disappeared, interest-only loans became rare and subprime lending ground almost to a halt. Lenders say they're largely back to old-fashioned lending, emphasizing fixed-rate loans, down payments and verified incomes.

Sources: First American Loan Performance, DataQuick Information Systems, California Association of Realtors, 1st National Home Loans, Roseville, Platinum Home Mortgage

GLOSSARY OF TERMS

Adjustable-rate mortgage: The monthly payment and interest rate is fixed for a temporary period – commonly two, three, five, seven or 10 years. That typically allows a lower monthly payment than with a fixed-rate loan. After the temporary period the interest rate "resets," typically making the monthly payment more expensive.

Option ARM: Considered one of the riskiest mortgages, it provides the borrower up to four monthly payment options. Typically, the lowest payment options don't cover the cost of interest; the unpaid amount is added to the loan balance. At about three years that larger loan amount "recasts" into a regular loan with significantly higher monthly payments. Many borrowers are unable to afford the new payments.

Stated income loan: Borrower provides no documentation of income such as pay stubs or tax returns. Lender makes a loan based on borrower's credit score and other assets.

Foreclosure: When a bank or lender repossesses the home. It's also called a trustee's deed.

Notices of default: When a borrower misses two or three monthly mortgage payments, lenders file a formal notice of default with the county recorder's office. It's the first step in the process that leads to foreclosure.

REO property: Short for "real estate owned." It means a bank now owns the home after taking it back from an owner who hasn't made payments.

Short sale: A distress sale in which the lender accepts less than what's owed on the house to avoid the more expensive process of foreclosing and reselling in a declining market.

Subprime loans: Higher-cost loans made to people with blemished credit histories. Interest rates for these loans are often three percentage points higher than regular loans. Lenders attribute the higher rates to the greater risks they take on when making the loan.

Source: Bee research

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