Roxie Chilcott, president of the San Diego chapter of the California Mortgage Brokers Association (who appears to be multitasking in her car), says the subprime situation will change a portion of the mortgage business in San Diego. (photo/alandeckerphoto.com)

It’s not 1991,” says Roxie Chilcott, president of the San Diego chapter of the California Mortgage Brokers Association. That’s the housing slump-turned-S&L debacle San Diegans are seeing in the rear view mirror as they look to the crucial spring and summer months ahead. Certainly, the landscape has changed, even since 2005. Twenty percent per year appreciation turned into a 6 percent loss in home values in 2006, with another 4 percent loss possible this year. Fewer teaser rates on adjustable rate mortgages are available, while stricter underwriting requirements for credit score and loan-to-value will keep more lenders out of trouble. Predictably, the subprime market has shown signs of weakness as ARMs reset and put pressure on those few home buyers who even mortgage brokers admit were ill-prepared to be in the market in the first place. But, so far, San Diego hasn’t taken the loss in values seen in other parts of the state, and the slump in California pales in contrast to the Midwest’s mortgage mess. In parts of San Diego County such as Poway, prices are going up and sales are swift. The amount of subprime loans in San Diego is low compared to inland California markets, and below the national average.

Although the home construction industry has been hit hard, a more diversified economy appears to be picking up the slack. San Diego’s unemployment remains low at 4.2 percent in February, down from 4.3 percent in January and the same as one year ago, better than both the state’s 5.2 percent and the nation’s 4.9 percent. Interest rates are still attractive. And in late March battered stocks like San Diego’s Accredited Home Lenders were bouncing back, as investors like hedge fund operator Citadel LP sense an opportunity in the subprime market.

Like some martinis, this market is stirred, but not shaken.

Some experts say a correction was not only inevitable, but overdue.

“We were pricing ourselves right out of the ability for even the upper end of incomes to be able to afford a home,” says Chilcott. That much is reflected in San Diego County losing population for the first time in three decades as home buyers “drive to qualify” for new homes in Temecula, Murrieta and points east.

The market developed with the idea that 20 percent per year appreciation was built in, Chilcott says, which made 100 percent loans possible. “They could make a 100 percent loan today and in six months they were 80 percent loan-to-value,” she says. “Everyone has profited from the huge growth over the last five years, but we didn’t self regulate ... knowing that real estate is cyclical. We needed to curb ourselves and get a lot tighter on our underwriting and lending a good two years ago, not just this past year.”

Chilcott says the subprime situation will change a portion of the mortgage business in San Diego. “As we move forward, I’m not sure we will ever again have the 100 percent financing,” she explains. “What lenders are doing is getting back to real underwriting and investments that make sense.”

Of course, most lenders never strayed into the subprime market.

She sees a rebound on the horizon. “The market will come back, but will it come back at 20 percent to 30 percent per annum appreciation? No, it will be more like a standard 5 percent to 10 percent.”

A silver lining benefit to the housing downturn is a more competitive market and affordable prices. “Developers will need to moderate prices to move inventory, and resale will follow, so that’s a benefit,” Chilcott adds. “We’ve needed to lower the overall housing prices for years; we were out of this world with our prices.”

The duration and severity of the downturn will vary by region, city, and sometimes city block, says Tim Sullivan, president of the Sullivan Group Real Estate Advisors, which supplies strategic planning services for the housing industry.

“I think that if you look at the impact the subprime market has had on San Diego, it’s noteworthy, it’s there,” Sullivan says. “But for the most part we’re not going to be in as bad a shape short run as some of the other markets where they really pushed buyers, like Phoenix.”

First American LoanPerformance reports the California markets with the highest percentage of subprime mortgages in December were less expensive than San Diego, inland markets such as Merced (21.6), Bakersfield (20.2), Riverside-San Bernardino (19.9), Stockton-Lodi (19.8), Modesto (18.2), Yuba City (18.0), Visalia-Tulare (17.5), Fresno (16.6), Vallejo-Fairfield-Napa (14.4) and Sacramento (12.7).

San Diego, the Santa Ana firm reports, has 9.6 percent, below the national average of about 14.7 percent and substantially below other metro areas such as Memphis (24), Miami (23) and Richmond, Va. (22).

In coastal neighborhoods, properties on the same block have been affected differently in the housing slump. “In some better located lots or homes in good shape you haven’t seen much change in value, but it’s a different story for the old house two doors away with no view,” he explains.

Sullivan says San Diego will continue to wrestle with the subprime slump, and sees the estimate of a 10 percent decline in housing values over the two-year span of the downturn through the end of 2007, as “fair.”

“I don’t think we’re going to be decimated by any means but we will feel the impact,” he says. “That said, the subprime problems are something we absolutely have to pay attention to, because I notice the defaults and the late mortgage payments are beginning to accumulate. I’ve been doing this for 25 years and I’m old enough to remember the down market in 1991 when foreclosures really spiked in Southern California and people got in with no underwriting, so I’ll be keeping my eye on the number of foreclosed units.”

Another indicator to watch is the number of loans that reset, says Scott Anderson, an economist with Wells Fargo in Minneapolis.

“I think there are already risks within banks’ loan portfolios that are already baked in the cake,” says Anderson. “The reason we’re seeing it show up first in the subprime areas is that the vast majority of those loans have already reset at higher interest rates. According to Fannie Mae, 60 percent of mortgages originated in 2004 reset last year and they reset one or two percentage points higher. If you look at other loan mortgage categories like jumbos, those are five to seven year ARMs, and they won’t be resetting until 2009. As these mortgages reset, it will push some home owners into default and you’ll see more homes come onto the market as the foreclosures take place.”

While expensive coastal cities like San Diego have fewer subprime loans than their inland neighbors, they have a higher than average percentage of ARMs. “The West Coast is vulnerable simply because of the high concentration of adjustable rate mortgages — in San Diego, about 62 percent of mortgages originated in second quarter of 2006 were ARMs,” Anderson says.

California has an above average concentration of ARMs especially in the subprime category, Anderson says. In 2004, about 90 percent of subprime originations were ARMs, he adds.

So far, the subprime slump is contained to the low end of the housing market. “Some of the concerns are overblown. Do I think the subprime problems are going to create a larger problem for the banking industry? (I’m) not quite so sure,” Anderson says. “Overall, portfolios of banks are still in very good financial shape, delinquencies on total loans and leases are at historical lows due to strong business credit, and this gives the financial system a cushion to absorb higher defaults and delinquencies. The worst case scenario is if this would spread and cause a credit crunch for consumers and I just don’t see that happening.”