Report:
Reckless mortgage lending in late '06 fueled California default wave

By Sue McAllister, The Mercury News

A new report pinpoints late 2006 as the time when the California mortgage market was most out of control — with some mortgage lenders acting so recklessly that two-thirds of the loans made during that time ended up in default.

The report by MDA DataQuick provides grist for those who say the industry needs greater regulation to avoid repeats of the subprime mortgage lending debacle.

More than 9 percent of California mortgages originated from August to November 2006 have resulted in lenders filing default notices, according to DataQuick, a real estate information firm. By comparison, the default rate for all the loans made in 2005 is 4.9 percent, the company said, and for 2004, it was less than 1 percent.

But several lenders had a particularly large portion of their loans from that period land in foreclosure, the company said: The three whose loans went south in the largest proportions were ResMAE Mortgage (70 percent), Master Financial (65 percent) and Ownit Mortgage Solutions (64 percent), DataQuick said.

ResMAE originated just under 3,500 loans in California in the four-month period in 2006, Ownit made about 3,130, and Master made 1,240, DataQuick said.

Many loans made by smaller lenders during the housing and credit booms were later sold to other investors, leaving the lenders with little "skin in the game" when borrowers failed to pay.

"Many, if not most, of the loans made in 2006 are owned and/or serviced by lending institutions other than those that made the loans," the DataQuick report said.

DataQuick's John Karevoll called mid- to late 2006 a "pocket of nastiness" in the state's lending industry, during which many lenders were making loans that had multiple risks — for example, no-money-down loans that also required no verification of the borrower's income. As a result, too many borrowers could not afford their loans and have defaulted or been foreclosed upon.

"This whole process, at least for a while there, just broke down," Karevoll said. "There was nobody out there minding the store."

Ownit, based in Agoura Hills, and Master Financial, based in Orange, have gone out of business. ResMAE is still operating, but under different ownership. No one at ResMAE, which has a mailing address in Kansas, could be reached for comment Wednesday.

Some say clueless or opportunistic borrowers bear responsibility for the housing bubble and its burst. But, said Ginna Green, a Bay Area spokeswoman for the Center for Responsible Lending, "You can't put 70 percent of loans failing only on the borrowers' shoulders. When we have failure rates that look like this, it indicates a stunning failure in the regulatory framework."

The Center for Responsible Lending and other consumer advocates have called for laws that would impose national licensing standards on mortgage brokers as well as help ensure that borrowers can afford and understand the loans they are taking.

Green said the DataQuick figures "are so overwhelming, it's proof something was wrong with the subprime market."

Said Dustin Hobbs of the California Mortgage Bankers Association, an industry trade group: "It's no coincidence that these companies are out of business" based on the lending standards exhibited by their default rates. But, he said, "There certainly is blame on both sides. Even borrowers who got loans they couldn't afford, they have to take some responsibility as well.

"There's more than enough blame to go around when default rates are that high."

A spokesman for California Attorney General Jerry Brown, Scott Gerber, said he could not comment about whether any of the companies named in the DataQuick release were being investigated for illegal lending practices, but said there were no closed settlements with any of them.

In fall 2008, Brown announced an $8.7 billion settlement with Countrywide Home Loans over lending practices the attorney general said were habitually deceptive. Gerber said prosecuting housing industry "scam artists" remains a priority for Brown's office.

DataQuick's report, like several others released recently, showed the number of California and valley homeowners behind on their mortgages spiked in the first quarter of this year following a period in which many lenders voluntarily opted to stall foreclosure proceedings.

Statewide, notices of default — which are the first step in the foreclosure process — rose to 135,431 in the first quarter of 2009, up 80 percent from the previous quarter and up 19 percent from the first quarter of 2008. In Santa Clara County, defaults increased 95 percent from the fourth quarter, and 33 percent from the first quarter of 2008. A total of 4,090 notices were issued in the county in January, February and March.