2 Bay Area examples of Lehman's lending Bay Area households barely earned enough to pay just the mortgage

John Pitts smiled after reviewing the paperwork for his modified home loan in Oakland, Calif. on Wednesday, Dec. 19, 2007. His lending bank agreed to modify the terms of the loan on his home of two years and convert it to a fixed-rate. less John Pitts smiled after reviewing the paperwork for his modified home loan in Oakland, Calif. on Wednesday, Dec. 19, 2007. His lending bank agreed to modify the terms of the loan on his home of two years and ... more Photo: Paul Chinn, The Chronicle Photo: Paul Chinn, The Chronicle Image 1 of / 1 Caption Close 2 Bay Area examples of Lehman's lending 1 / 1 Back to Gallery

In the wake of the Lehman Bros. implosion, it's eye-opening to look back at two specific mortgages the venerable Wall Street institution underwrote in the Bay Area.

A year ago, as The Chronicle began portraying the strange world of subprime and explaining why people suddenly were so worried about foreclosures, it profiled four Bay Area families facing the loss of their homes, telling their personal stories and tracing the history of their loans. All had subprime mortgages that were clearly unaffordable, with monthly payments that ate up almost their entire income, leaving next to nothing for food, gas or utilities.

All four households had arranged their loans through brokers acting as agents for mortgage-origination companies, and thus responsible for following the standards set by those companies.

It turned out that two of the four households had subprime mortgages originated through a company called BNC Mortgage in Irvine, Lehman's subprime lending subsidiary. The investment bank had owned a stake in BNC since 2000 and fully acquired it in 2004.

A BNC representative said the company had a strict policy of not commenting on specific cases out of privacy concerns, he said. Fair enough; many firms have similar policies.

He provided a specific quote: "As a responsible lender, BNC Mortgage works hard to ensure that its loans meet our underwriting guidelines."

BNC had looked at the two specific cases and was satisfied they had been underwritten to its guidelines, he said. He enumerated the categories it had considered: loan-to-value ratio, income and how it was verified, payment shock compared with previous payments, and credit history.

That all sounded reasonable in the abstract. But what about the specifics in these cases?

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.

Both borrowers had tarnished credit. Presumably, that high risk was why they both received "low introductory rate" mortgages that started at just above 10 percent.

In both cases BNC sold the loans after origination. Lehman was in fact the nation's leading underwriter of subprime mortgage securities in 2006, according to Inside Mortgage Finance.

But in Wall Street's version of an appliance warranty, originators are required to buy back securitized mortgages that default within the first few months. In fact, many of the subprime lenders that went belly up last year blamed their shaky financial situations on being forced to buy back toxic loans. Because the Hahns never made a single mortgage payment, presumably BNC was liable for their $570,000 mortgage.

Loss tops $200,000

Public records show the house reverted to the loan servicer at a foreclosure auction in December 2007 and was sold in January for $375,000. That means the loss on that single mortgage was $195,000 plus carrying costs, real estate commission, back taxes and other fees - perhaps a quarter of a million dollars total.

Pitts, the other homeowner, convinced his mortgage servicer, Chase, to offer him a loan modification, freezing his interest rate at a somewhat-manageable level. He was one of the lucky ones. Although he'll have to work more overtime to make the new payments, it appears he will keep his house.

Lehman shut down BNC in August 2007, taking a $52 million charge and jettisoning 1,200 employees. It was the first big Wall Street institution to exit subprime lending. "Market conditions have necessitated a substantial reduction in resources and capacity in the subprime space," Lehman said at the time.

The next month, news reports proclaimed Lehman's third-quarter earnings as cheery news because the credit crunch had cost it "only" $700 million. "The worst of this credit correction is behind us," Lehman's chief financial officer, Chris O'Meara, said in a conference call with analysts.

That triggered a flood of upbeat headlines, which now resonate with irony considering that Lehman would be bankrupt within a year: "Lehman profit is stronger than expected; Wall St. relieved," said the New York Times. "For Lehman, a sigh of relief," wrote BusinessWeek.

These two Bay Area mortgages were just two small drops in the bucket for Lehman. But they provide a cautionary look at some of the ways in which relaxed lending standards helped bring a giant institution to its knees.