Mortgage implosion: National disaster strikes home
Last week was the worst work week Todd Hawkins has ever experienced. His employer, American Home Mortgage, closed its doors and declared bankruptcy after a two-week downward spiral, leaving Hawkins, his wife, Angela, and eight other local employees out of work and scrambling to find money to fund loans on houses that were supposed to close, some within hours.
Last week wasn't so good for Maurie Sutton, either. Hawkins was handling the loan on the new house she's building, but that's not the worst of her problems. Two weeks before closing on the sale of her condo, the buyers bailed because of rising interest rates. Until Sutton sells the condo, she's unable to close on her under-construction dream house.
The problem with American Home, stresses Hawkins, is not subprime mortgages, but some bad news earlier in the year has had a ripple effect throughout the industry and shaken Wall Street.
In 2001 Hawkins started working at Columbia National Mortgage, which was bought by American Home Mortgage, the 10th largest lender in the country. "Forbes recognized us as the fastest growing company two years in a row," says Hawkins. "We were one of the two mortgage lenders that had positive first quarters."
As he watched the company unravel over the past two weeks, Hawkins notes the irony: "What served as a catalyst was [the nation's largest mortgage lender] Countrywide announcing it was missing its second quarter earnings and the CEO quoting gloom and doom." That bombshell made it clear that it wasn't just subprime borrowers who were in trouble, but that people with good credit were defaulting as well.
American Home specializes in "Alt-A" mortgages for borrowers who have good credit but don't necessarily qualify for prime mortgages. "Most of my borrowers have mid-700 credit scores," says Hawkins.
As creditors squeezed American Home's credit lines, employees expected the company to be sold. When Hawkins went home on July 30, he was 99 percent sure a deal with IndyMac Bancorp was in the offing that would save the company.
By August 2, that deal was dead, and American Home was no longer funding loans.
"The first thing they told us was to get out," Hawkins says. "We didn't know if the sheriff was coming... I've been told other branches have been padlocked." Staffers loaded up personal effects, fearful that if bankruptcy was filed, they'd have to petition the court to retrieve their belongings.
Hawkins had a van and cleared out his and Angela's offices. And then he had to notify his clients that there was a problem.
"The first call I had to make was to the parents of a dear friend who were moving to Waynesboro," says Hawkins. "The moving van was on the way, and I had to say, 'We can't fund your mortgage.'
"My next call was feverishly trying to find someone else," he continues. Because the loan amount was small, he was able to save that loan. "They did close that afternoon," he says.
Others weren't so lucky. Some sales were recorded before they were funded, and buyers were told they had to move out of what they thought were their new homes, says Hawkins.
"What's crazy is when we found out we weren't funding, within an hour we had other brokers calling to offer jobs," says Hawkins.
Recent years of low interest rates, rising home prices, and creative financing, such as zero-down loans, led buyers to sign on to more house than they could afford. With interest rates rising and home prices falling, people are finding they no longer can afford to pay their mortgages.
"We have new types of debt and risk instruments that haven't been tested," says Hawkins, who has an option ARM on his own house. It's not for everyone, but he says it works for him.
It was the rising interest rates that caused Maurie Sutton's buyers to renege on their contract to purchase her Stonehenge condo two weeks before closing.
The buyers, Mohan and Nilam Prashain, were pre-approved for a 5.75 percent loan when they signed the contract in May, Sutton says, which was sufficient to buy her $224,900 condo unit. According to Sutton and her real estate agent, Andy King, the contract was contingent on the buyers getting a loan at 6.5 percent or lower.
"They were supposed to lock in a rate," says King. "They simply didn't do it." Sutton offered to pay a point on their zero-down mortgage, as well as part of their closing costs.
"The buyers, after entering into a contract, decided they didn't like the interest rate," says King. "They blew it off. It was in the contract... I believe when you enter a contract and don't lock it in, that's on you. For them to bail like that so close to closing is just wrong."
The Prashains and their agent, Steve Taylor, did not return phone calls from the Hook by press time.
Sutton intends to keep the Prashains' $1,000 deposit, and could sue them to enforce the contract, says King. Her condo at 605 Whitcover is back on the market, and she'll be having an open house Sunday, August 12.
She's asked her builder to slow down construction on her new house, which she'd hoped to move into by September. Now she's back to square one and facing trying to sell her condo well past the peak spring selling season.
"It's not just Charlottesville," says Todd Hawkins of the recent mortgage market woes. "It's everywhere." American Home will be the poster child of the mortgage industry debacle, much like Value America was for the collapse of the dot.com era, he suggests.
He assures homeowners that the recent turmoil does not affect their current mortgages, which are binding contracts. If the mortgage servicing changes, there should be two letters– one from the old and one from the new servicer. "Don't just start rerouting money if you get one letter," he cautions. Bankrupt mortgage lenders and their borrowers are easy targets for thieves.
Hawkins has a two-week vacation to sort through what comes next. "I'm totally in limbo," he says. "Every time I turn around I get a different direction. Good thing I'm going on vacation. The best time to go on vacation is when you get canned."