Mortgage washout has small impact in Sisters

The recent meltdown of the subprime mortgage market is one more factor in the complex economic picture that confronts the current real estate market and the Sisters economy. Subprime mortgages are loans provided to borrowers who do not qualify for loans from mainstream lenders.

Although the subprime mortgage debacle has been disastrous for some areas of the country, Sisters has been relatively immune to the catastrophes that are plaguing lenders carrying this type of mortgage. This is because there aren't a lot of subprime mortgages in the immediate area.

That's not the whole picture, however.

The subprime mortgage has helped to fuel the real estate market in Central Oregon and a few other national hot spots that enjoyed growth when much of the rest of the country was on the ropes. But many with an understanding of economic cycles grew uneasy as politicians, bankers and home builders boasted about the growth in home ownership.

The reason for the growth in home ownership was that in the subprime mortgage world, all that was necessary to get a loan was to prove that your body was warm. In the last few years as many as six million bad credit risks have succeeded in obtaining the financing they needed to buy a house.

As long as housing prices were climbing higher almost by the hour, the subprime mortgage holders generally managed their monthly payments, although there are numerous stories of people missing their first payment on a no-down-payment mortgage.

People who ran into trouble could easily refinance the house and cover their payments that way, something that ceased to be possible when house prices plateaued and then began to move downward.

Other subprime borrowers ran into trouble when the period of the introductory teaser interest rates expired and their monthly payments jumped by hundreds of dollars. Official figures have not yet been published, but it appears that somewhere between 15 and 20 percent of all subprime mortgage borrowers are behind in their payments. That works out to be an enormous sum of money.

"About 30 percent of the subprime lenders have either gone bankrupt or abandoned this area of business," said Bob (Bucky) Buckmann of Klondike Mortgage.

However, Buckmann indicated that this factor has not affected his business to a large degree as there were not many subprime loans being made in the area.

Between subprime mortgages and prime mortgages, which are the loans with the lowest interest rates and the best terms, there is an intermediate category of loans that are much more common in the Sisters area. These loans are known as Alt-A mortgages. Alt-A borrowers often have good credit ratings but perhaps have purchased a second home to flip on speculation.

These borrowers are also facing increases in their monthly payments and a small but increasing number of these loans have fallen into arrears. Many major lenders are expecting another tsunami of defaults coming from the Alt-A mortgage market.

The investment segment of buyers has been largely responsible for driving the local housing market, and this factor is becoming worrisome to many lenders.

"Many of the purchases are for people that are investing in the local real estate market as opposed to houses being purchased for a primary residence," said Gary Oldham, of GMAC Mortgage in Sisters.

This same investment philosophy has spelled the death of affordable housing in the hotter markets like Central Oregon.

The current situation is uncharted territory since the guidelines driving the market today are so dissimilar to those of the market during the last real estate crash about 25 years ago.

It is still up in the air as to who will be injured and how badly. It could be the homeowners, the investors and/or the banks. It is possible that everyone will take a small hit and somehow survive the mess. But it could get much messier with a large number of people being tossed out of their homes and an increasing inventory of homes that will further damage the fragile housing market.

"What bothers me the most about the failures in the mortgage market and the loss of subprime lenders is that it means that a lot of good people will never have the opportunity to purchase that first home," said Buckmann.