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No subprime crisis – yet

Spokane keeps waiting to see if the credit crunch afflicting the mortgage industry across the country will spread to the Northwest.

So far, the region has avoided the problems created elsewhere by the subprime meltdown.

But no one is sure to what extent residents have been affected by subprime mortgages – home loans with higher interest rates or unusual terms that until recently were marketed to people considered a higher credit risk.

“There’s no trail to follow,” said Deborah Bortner, director of consumer services at the Washington Department of Financial Institutions. “For statistical purposes, no one really keeps track.”

There are some good guesses.

Bortner is sure Washington has fewer subprime loans and thus less risk of the problems plaguing, say, California and Florida.

The best estimate is that perhaps 8 percent of Washington mortgages qualify as subprime. In some states it is about 25 percent.

Despite subprime loans’ wolf-at-the-door reputation, they’re credited with putting more people into homes. The problem, mortgage specialists say, is that some of those people shouldn’t have been able to access mortgage money in the first place, either because of credit problems or because they never had the financial ability to pay back the money. As interest rates rise, some are defaulting on their loans

The refinancing boom of the past several years has allowed homeowners to tap equity in their homes during the price run-up. As lenders constrict that flow of refinancing cash and tighten borrowing standards for new homebuyers, the problems likely will show up here – the question is to what degree. The Pacific Northwest so far has proven resilient.

Home sales slowed slightly in Spokane this year, down 4 percent from the first eight months of last year, according to the Spokane Association of Realtors. Sales of new homes were off 10 percent. The average sales price, however, was up more than 10 percent.

“All this considered, the market here is still doing pretty well,” said Grant Forsyth, an Eastern Washington University economist and incoming chairman of the Real Estate Research Committee, which publishes the comprehensive Real Estate Report twice a year.

Nice homes that are priced right continue to sell quickly. In Spokane County there are 3,240 listings, about 26 percent more than a year ago. Those with a higher price tag need extra work, though, Forsyth noted, “people from outside are still kind of astonished about what you can get for your money and how modest the taxes are.”

He noted that the area’s economy continues to perform, even if job growth has slowed a bit from its previous pace.

“There’s no shame in that,” he said. “Things have been better here than in the United States (as a whole).”

Job and income growth are partly tied to area construction, and Forsyth said that as building ebbs there has been a surge in commercial construction. Part of that, he acknowledged, has been driven by low interest rates.

“The danger, what everyone is concerned about, is what happens if banks tighten or withdraw credit for commercial construction?”

It’s too early to tell if that will happen, Forsyth said.

And there’s another problem that will arise next year, said Tom Flanigan, branch manager and mortgage consultant for Golf Savings Bank, the mortgage unit of Spokane-based Sterling Savings.

More than $1 trillion of adjustable rate mortgages change from their fixed-rate introductory years to variable interest years beginning in 2008. This, Flanigan said, is when the credit crunch could bite Spokane.

“There’s a ton of adjustables here,” he said.

Interest rates and mortgage payments will jump next year unless people are able to refinance their homes.

And therein lies a problem: Borrowing terms have tightened and people with low to modest credit scores will find it more difficult to refinance with good terms. Furthermore, too many people have tapped the equity in their homes and spent it rather than saving or investing.

“Are we immune or do we have our heads in the sand?” Flanigan asked. “Who’s to say?”

People should review their mortgage terms and, if they are worried or want to refinance, they should call a Realtor and ask for a local mortgage reference rather than trying to find a loan product on the Internet, he said.

Jeff Berglund, owner of Morgan Mortgage, a small business in Spokane, said problems with credit are about context.

“The sky is not falling. People who are taking care of their credit are going to be fine,” he said. “Some people may have to wait a while to buy their first home, but that’s OK. For a while there, it was easier to buy a first home than to qualify to rent an apartment.”

He called the credit crunch part of a market cycle that was overdue and believes that there was a national housing bubble.

“We just simply couldn’t keep up, and yes, I think we’ll see some of it in Spokane,” he said.

Some buyers won’t be able to borrow as much and will have to buy more prudently compared to six months ago.

People with blemishes on their credit reports already are finding out how much harder it is to access cheap money.

Still, Glenn Crellin, director of the Washington Center for Real Estate Research in Pullman, said it appears Spokane and the rest of Washington have escaped the big problems elsewhere because of lower exposure to subprime loans, because people here are more conservative with money, and because the area doesn’t have as many people offering what he called “innovative mortgage products.”

“Lenders I talk to don’t have many of these no-money-down, two-year teaser rates,” he said. “Those are areas where there’s real problems.”

Crellin said 15 percent to 20 percent of all economic activity in Washington state is tied to housing, from construction, to maintenance and repairs, to buying and selling.

He said if the credit crunch rolls through the state, it will be short-lived.

“That’s my personal bet.”