S.A. lenders say city, state positioned to weather subprime storm

Foreclosure rates on loans in Texas went up slightly this past year, but at a much slower clip than the national rate, according to the Mortgage Bankers Association's latest national delinquency survey.

The Washington, D.C.-based industry organization's survey shows that Texas' foreclosure rate rose from 1.24 percent in the fourth quarter of 2006 to 1.36 percent in the fourth quarter of 2007.

The U.S. foreclosure rate over that same period increased from 1.19 percent to 2.04 percent.

The story was the same for the subprime loan market. A subprime loan is one that is offered at a higher interest rate to borrowers who have nicks in their credit history.

Subprime foreclosure rates for the fourth quarter of 2007 came in at 5.28 percent for Texas and 8.65 percent for the United States overall. This represented an increase over the fourth-quarter 2006 subprime foreclosure rates of 4.32 percent for Texas and 4.53 percent nationwide.

Ironically, says Doug Foster, commissioner of the Texas Department of Savings and Mortgage Lending, Texas has the lowest borrower credit scores, on average, of any other state in the country.

"That's really bad for us because the credit score is the major factor that determines what type of loan you get," Foster explains. "With Texas having the lowest score, you'd expect it to have a higher volume of subprime lending."

What helped Texas, he says, is a low unemployment rate and conservative property values that haven't gone up significantly in 10 years -- unlike states on the East and West coasts.

Dick Evans, chairman and CEO of both Cullen/Frost Bankers Inc. and its subsidiary, Frost National Bank, says the health of the local economy as well as the economy across the state has played a significant role in shielding homeowners and lenders in the Lone Star State from the brunt of the subprime lending crisis. He adds that job growth is a key to the state's shelter from the storm, with the state economy expanding jobs at twice the rate of the U.S. average.

"If you're growing jobs, then you have the foundation for a good economy," Evans says. "We have also seen ... that prices of houses have not decreased, whereas the nation has seen significant decreases."

Still, D'Ann Petersen, business economist for the Federal Reserve Bank of Dallas, says Texas is not immune to the subprime ARM (adjustable rate mortgage) delinquency woes.

As interest rates reset in the future on homes purchased with ARMs, she says still more homebuyers drawn in by creative financing may be unable to afford the higher monthly payments.

Also, Petersen says, the housing market overall has been negatively impacted by the subprime meltdown, resulting in tighter lending standards, resulting in many more loans being made with traditional fixed rates and stiffer downpayment requirements.

"This has resulted in less home demand, especially at the lower end of the price distribution where creative financing was popular in recent years," Petersen says.

The good news, she adds, is that Texas appears to be holding up well relative to other areas of the country.

"While Texas will be impacted by the national housing and financial woes, the state may weather the storm better than some other areas of the country.

"Texas housing prices are more affordable than those in other parts of the country," she says.

Lending differences

Many banks operating in San Antonio -- such as Frost National Bank, Guaranty Bank and Broadway Bank -- do not offer subprime loans to their customers.

Bill McCandless, president of Lone Star Capital Bank, says his bank also has elected not to make subprime loans -- adding that the customers the bank serves have not requested this type of product.

"Trying to justify a higher interest rate to offset a potential collection problem just doesn't work for us," McCandless says.

Bank of America spokeswoman Britney Sheehan says the lender does not originate subprime loans. While declining to discuss the bank's acquisition of the nation's largest mortgage lender, Calabasas, Calif.-based Countrywide, Sheehan says the Charlotte-based lender has "one of the lowest foreclosure rates" of all the major financial institutions in the country.

However, tougher lending practices are being employed by financial institutions that do offer higher-rate subprime loans.

Helen Bow, Houston spokeswoman for Wells Fargo, says the lender has largely avoided many of the problems seen in the subprime loan market by employing responsible lending practices that focus on the consumer's ability to repay.

"These lending and servicing principles are not viewed as policies by which we have to abide, but instead are the way we choose to do business. These practices have served us well in turbulent times," Bow says.

Furthermore, she says, unlike many of its competitors, Wells Fargo chose not to make, purchase or sell negative amortizing, or Option ARM, loans -- which allow borrowers the option of making lower front-end payments that result in a growing loan balance, or negative amortization.

In addition, Bow says customers with credit scores below a certain threshold are serviced only on behalf of investor partners -- who assume the credit risk.

"We know that these fair and responsible lending practices make a difference. The subprime loans originated by Wells Fargo Home Mortgage have historically had foreclosures that are half that of loans not originated by our company," she says.

Greg Hassell, spokesman for JPMorgan Chase, says in 2006 and 2007, the financial institution sold most of the subprime loans it originated to the secondary market, limiting its exposure to loan losses.

Today, however, he says the bank is holding the subprime loans it originates in its own portfolio because the secondary market began shunning those products last summer.

The bank originates about $1 billion in subprime mortgages per month.

When underwritten well, he says, these loans help families achieve their dream of home ownership.

By the same token, he says, the bank has tightened its lending standards on those loan products, requiring larger down payments and higher credit scores.

Using these guidelines, the lender is now approving only about 30 percent of the subprime loans that would have been approved two years ago.

"This is true in San Antonio, in Texas, and in all our markets," Hassell says. "Chase has modified or refinanced $3.6 billion of subprime ARMs that it services and is processing $3 billion more.

"Together, that's 51 percent of all Chase-serviced subprime ARMs (59 percent of the total dollar amount) due to reset by March 2008," Hassell adds.

But despite the current economic downturn and the fact that many banks have tightened lending practices considerably.David Moreno Jr., president of locally based San Antonio National Bank, says his institution continues to look at ways to expand its loan portfolio.

Many banks not headquartered in San Antonio, Moreno says, have "typically moved toward stricter lending policies within this city" because of their unfamiliarity with the local economy.

"Many banks are steering clear of subprime lending all together," he adds. "Though we recognize the increased risks in this form of lending, we continue to look at each loan individually rather than making a blanket decision on subprime loans."