Any Washington initiative to deal with the national subprime mortgage crisis will probably focus on education and counseling, not relief, for the thousands of homeowners whose monthly payments will climb in the next few months.
With only a month to complete its work, a Task Force for Homeowner Security formed in September by Gov. Chris Gregoire has been considering what steps can be taken in Olympia to prevent the widespread foreclosures devastating markets in states such as Florida, California, Ohio and Michigan.
So far, job growth and higher home values have kept the foreclosure wolf at bay in Washington as well as Idaho, as have somewhat more prudent lending practices.
“We are in kind of a fortunate space,” says Carol Nelson, who chairs the task force. Nelson is chief executive officer of Everett-based Cascade Bank and former chairman of the Washington Bankers Association.
Nelson says Cascade did not make subprime loans, but, like Washington’s other conservative banks, has been sullied by the actions of irresponsible institutions and brokers who peddled loans with low starter rates to unqualified borrowers. Many of those lenders are closing their doors.
Unfortunately, the borrowers they leave behind will see their monthly payments jump as starter rates expire. As many as 2 million homeowners across the country could face foreclosure over the next 18 months.
According to information compiled by the Wall Street Journal, which is among the resources the task force is using to gauge Washington’s potential exposure to mortgage trouble, about 24 percent of mortgage loans in 2006 were “high-rate,” which does not necessarily equate to subprime. The percentage in Idaho was slightly higher. Those figures put both states among those less vulnerable to subprime problems.
Scott Jarvis, director of the Department of Financial Institutions, says more mortgages will adjust to higher rates through the winter and the number will remain high for the rest of 2008. Many homeowners will be able to seek refinancing because their properties have appreciated, but tight-fisted loan officers are going to scrutinize applications the way they seldom did when the money was easy, he says.
“We’re going to see a bit more strain on the system before we turn the corner,” Jarvis says.
While Wall Street and Congress try to sort out liquidity problems that are drying up credit in many markets, the task force is looking at financial education in schools, and counseling before and after the mortgage process, including how best to respond when foreclosure seems inevitable.
“A lot of people put their heads in the sand,” Jarvis says. “We need more sophisticated borrowers.”
Financial literacy could be taught at the K-12 level most readily if a way can be found to build instruction into or around the almighty WASL. Counselors are available in many communities, but they lack the people to reach everyone in need. An offset on the business and occupation tax for contributions to a fund to support counseling efforts is one possibility.
If that carrot does not work, allowing borrowers victimized by predatory lenders to collect $50,000 in damages instead of $10,000 may be an appropriate stick, although recovering anything from bankrupt loan companies is unlikely.
Gregoire, in a Nov. 7 letter to the task force, asked members to consider, too, how well loan products are matched to borrowers, better disclosure and whether refinancing benefits the consumer.
Although direct relief for homeowners is not off the table, Jarvis says the state does not have the money to reach many borrowers. And deciding who would receive the limited dollars that might be available could provoke a backlash among home buyers who did not let themselves get overextended.
The state can do only so much, he says. “There is no silver bullet.”