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Sep 25 / Jonathan

What subprimes look like

Last week the SF Chronicle published a story describing two subprime mortgages written in San Francisco by Lehman Brothers subsidiary BNC Mortgage.

One homeowner, Johnny Pitts, was a Muni bus driver who had bought an Oakland home for $429,950 in 2005. His mortgage payment, which had started at $2,880, was about to reset to $3,730 a month – plus $750 more for taxes and insurance. Home payments are supposed to be no more than 40 percent of income. By that formula, the necessary income would have been $11,200 a month or $134,400 a year. Was it reasonable to assume a bus driver was bringing home that kind of money? In fact, Pitts’s take-home pay was just $4,000 a month.

Loans both 100 percent

The other homeowners, Jeff and Vanessa Hahn of Fairfield, were on the hook for monthly payments of $5,000 – exactly the amount they earned together as a self-employed businessman and teacher.

As for loan to value, in both cases it was 100 percent – hardly a desirable ratio. Pitts had a piggyback second loan; together the two loans accounted for the full purchase price. The Hahns had done a cash-out refinance for their home’s full assessed value of $570,000 in March 2007, a few months before the article was written.

And the values themselves were questionable. Within months, both homes were worth about $100,000 less than the loans – but based on that rapid rate of decline it seemed likely they had been worth less even when the mortgages were written.

Lehman is gone, of course, but it’s hard to believe that they were very much the exception.

This is part of the background to the current bail-out talks.

Bonus: Lehman’s mission statement:

We are one firm, defined by our unwavering commitment to our clients, our shareholders, and each other. Our mission is to build unrivaled partnerships with and value for our clients, through the knowledge, creativity, and dedication of our people, leading to superior returns to our shareholders.

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