The world's markets are being rocked by what many experts describe as an unprecedented meltdown in lending practices caused by the collapse of the subprime market.

The impact is not only hitting risky, high-interest sub-prime loans that helped fuel Denver's record number of foreclosures but is taking a toll on typically high-quality "jumbo" loans and commercial lending.

The record $5 billion in commercial real estate sales in Denver last year - and the record pace in the first half of this year - couldn't happen today because of the turmoil on Wall Street, according to Denver-based Eric Tupler, managing director of CB Richard Ellis/Melody Capital Markets.

Last year, Tupler originated $2.1 billion in loans, the most of anybody at the company.

Billions and billions of dollars packaged by Wall Street for commercial loans have evaporated, he said.

"It changed on a dime," Tupler said. "The general consensus is that we will see some clarity of what will happen after the Labor Day holiday."

But it's the home buyers on Main Street who are feeling the brunt of what happened on Wall Street.

"The best I can tell, mortgage bankers needed to find a way to prop up their loan volume a few years ago and decided to relax their underwriting standards a bit," said Brian Bartlett, a broker with RE/MAX Southeast, wrote in an e-mail to the Rocky Mountain News. "Then, as these higher risk loans were packaged (on Wall Street) and gobbled up by investors chasing higher yields, the bankers kept incrementally relaxing underwriting a bit at a time. . . . The assumption was made that increasing market values would offset the risks. That didn't happen."

The turmoil caused by loose lending standards is causing a rapid return to traditional lending practices that required down payments, credit checks of borrowers and proof that they actually have an income.

Even before high-profile events, such as the stock market losing nearly 400 points Thursday, the industry was becoming more conservative.

"It's back to the future," said Lou Barnes, president of Boulder-based Boulder West Financial Services.

"In the last nine months, the marketplace eliminated 25 percent of the worst nouveau lending practices, and in the last two weeks, the market eliminated the other 75 percent," Barnes added. "We set the clock back 10 years in two weeks."

And while Denver is being buffeted by the same economic forces being felt worldwide, the local housing market is not expected to suffer as much as formerly hot housing markets such as parts of Florida, Arizona and Las Vegas, which now are starting to see huge home price slumps, Barnes said.

Peter Lansing, president of Universal Lending, who four years ago lost business by shunning "funny money" lending, said he has never seen such turmoil in the market in 30 years in the business.

"I really believe this is a pretty big watershed event in the mortgage banking business that is going to change the face of mortgage banking back to normal lending practices - that sounds like an oxymoron, a watershed event that takes us back to what is normal," Lansing said.

Don Opeka, principal of Orion Mortgage, said it's been more than a year and half since he originated an adjustable rate mortgage.

Mary Feindt, a senior loan officer at Englewood Mortgage Co., said the industry is drifting in uncharted waters but she thinks the market will settle down fairly quickly.

"I don't think it is any surprise that we're having these problems caused by subprime lending practices," she said.

But Realtor Bartlett thinks the hangover from the easy money party is not something that will end soon.

"The final effects and ramifications won't be seen for months or years," Bartlett said.

"Home purchases could grind to a halt unless the Fed pumps some liquidity into the markets by lowering the rates soon. Builders, banks, investors, Realtors, mortgage brokers, title people, inspectors, contractors, remodelers, Home Depot. The ripple effect could be enormous."

Inside the market

Losses related to housing loans are emerging in more investment funds, leading investors to wonder who will be next.

• The latest fallout: After markets closed Thursday, mortgage lender Countrywide Financial said "unprecedented disruptions" could affect its financial condition. Also, Washington Mutual fell 2.2 percent after it said liquidity in the market for nonprime home loans and securities backed by the loans has "diminished significantly."

• Market impact: The news unnerved already-jittery markets. The Dow is down 761 points since its record close of 14,000.41 on July 19.

SOME NUMBERS:

• Lenders made an estimated $581 billion in option ARM loans during 2005 and 2006 while doling out nearly $1.4 trillion in interest-only ARMs, according to LoanPerformance.

• A recent study estimated about $325 billion of these loans will default. By comparison, about $212 billion in subprime loans were delinquent through May.

Rocky Reports

rebchookj@RockyMountainNews.com or 303-954-5207

Back to Top