Asbury Park Press

Loans Squeeze Homeowners

Borrowers get in over their heads

Asbury Park Press — Sunday, October 14, 2007

BY JASON METHOD
STAFF WRITER

Expensive, high-interest-rate mortgage loans continued to grab a larger share of the market last year, and thousands of homeowners in New Jersey like Paul and Elizabeth Duncan are feeling the squeeze.

The Toms River couple are finding it increasingly hard to make the $3,200 monthly payments on their $327,000 mortgage, which they refinanced last year at a 9 percent interest rate. They are not sure how they are going to make this month's installment.

"We have more going out than coming in," Elizabeth Duncan said.

Soon, the Duncans say, they may be forced to sell their new dining room furniture, or take out a cash advance on a credit card in order to make payments and buy some time.

One in four mortgage loans in New Jersey last year were given to subprime borrowers like the Duncans, an Asbury Park Press analysis of new federal mortgage data shows. The loans typically come with interest rates higher than the prevailing market.

The housing and mortgage markets have struggled this year with the effects of those loans, usually granted to borrowers with poor credit or those who had borrowed for late taxes, the Duncans said they failed to realize that the loan, unlike most mortgage loans, did not include payments for property taxes. Buried one-inch deep in the paperwork was an "Escrow Waiver" form, mixed in with several other required disclosures.

Subprime lending continued at a breakneck pace through last year: 29 percent of all loans nationally, worth $600.2 billion, came with high interest rates, according to the federal data.

That could indicate that many new borrowers will face tough times. The cost of the loans could likely drain family income and force those who are not in trouble yet to begin to default.

The current rise in foreclosures – the highest in 10 years – and late mortgage payments is a ripple effect caused by borrowers who took out loans in 2004 and 2005, experts say. If the 2006 borrowers follow the same pattern, the housing market could see an overwhelming number of defaults in the next couple of years, experts say.

The Press analysis found that in Monmouth and Ocean counties last year:

One in five home loans were granted to subprime borrowers, for a total of $3.1 billion. In 2004, about 1 in 10 loans had gone to subprime borrowers.

The income of subprime borrowers was 5 percent lower than those taking out traditional mortgages, yet the subprime borrowers took out loans that were 10 percent larger. That means subprime borrowers, already facing higher interest rates, will be further strapped to make mortgage payments, especially if their mortgage interest rates adjust upward in the coming
years.

More subprime money was lent in 2006 than the prior year. The median subprime loan of $221,000 in 2006 is up from $203,000 in 2005. A median means half borrowed more, half borrowed less.

As property values skyrocketed through the early part of the decade, many borrowers used subprime loans to help buy more expensive housing, or pay off debt. If they got into trouble on the loans, they could quickly sell the house in a hot real estate market to avoid default.

But that has become less of an option today, as real estate prices have dropped and many homeowners have loans larger than the value of their houses.

Jeffrey G. Otteau, a New Jersey real estate analyst and appraiser based in East Brunswick, said the new mortgage numbers are discouraging for those looking for an end to the real estate slump.

"This tells us that the problem of delinquencies and foreclosures will continue to worsen, and should continue to expand for the next two years," Otteau said.

So ever more homebuyers will fall behind as (adjustable) interest rates reset into 2008."

Yet as bad as it may be in New Jersey, it is worse elsewhere.

Once concentrated in low-income or urban areas, subprime lending has spread to almost all areas of the country, the Press found.

In Florida, Mississippi, Nevada and Maryland, more than one in three loans came with high costs. Vermont had the lowest percentage of subprime loans, with 18.7 percent of the mortgage market, compared with New Jersey's 26.4 percent.

In many areas, high-income borrowers, earning $120,000 or more a year, were just as likely to hold subprime loans as borrowers with incomes less than $52,000.

For example, on Nantucket Island, Mass., and in Manhattan, the average subprime loan came to more than $580,000, tops in the nation.

The subprime debacle has had a detrimental effect on both Wall Street and Main Street this year. Foreclosures are up and housing prices are dropping. The number of new homes in New Jersey is half of what it was two years ago, Otteau
said.

The pullback has hurt even top luxury home builders, like Red Bank-based K. Hovnanian, which reported a loss of $80.5 million last quarter.

There are two schools of thought about what has caused the meltdown among subprime borrowers.

Bankers and lenders have largely blamed consumers who racked up credit cards and bought new SUVs, then refinanced homes to pay for it. They also say many buyers used "stated income" loans, where documentation was not required, but did not
earn as much as they claimed.

Richard G. Stafford of Capital Home Mortgage in Spring Lake said he believes many borrowers were addicted to shopping.

"They didn't change their lifestyle," Stafford said. "The appraisers were generous to them. They just kept refinancing and then maxed their credit cards out again."

Phyllis Salowe-Kaye, executive director of the consumer advocate group New Jersey Citizen Action, called such comments "blaming the victim."

She and other advocates fault mortgages sales staff who gave loans to borrowers who never could make the payments long term or made promises that were not kept.

"These people are in business to make money, but they're in the business to makemoney on the backs of people," Salowe-Kaye said.

The Duncans appear to be an example for both arguments.

The couple married in 1999, but with two children each from previous marriages, they soon found that their two-bedroom mobile home was much too small. They bought the three-bedroom colonial in 2004 with $28,000 down and a $211,000 mortgage, land records show.

The Duncans earn $80,000 a year. Paul, 47, works as a dairy manager at a local supermarket. Elizabeth, 43, is a teller at a local bank.

They said they so enjoyed owning the house that they took out a $50,000 home equity loan to build a 450-square-foot family room extension.

They also racked up another $46,420 on five credit cards as they landscaped their front yard, and purchased new televisions, a $5,500 dining room set and a $5,000 pool table.

With bills piling high, a telemarketer called one day and offered a mortgage refinancing to Elizabeth. The woman told her they could refinance all their debt and pay $400 a month less than they were before.

When the notary arrived with the mortgage papers to sign, Elizabeth said she did her best to read all the paperwork. She stopped the closing because she noticed the $350 appraisal fee, which they had already paid in cash, was added into the loan.

The salesperson, over the phone, assured the Duncans that the fee would be adjusted later, and the Duncans signed the papers.

The credit card and home equity payoffs, along with mortgage company fees, came to $327,000, at a 9 percent per year interest rate.

But there was a catch.

Until they received a notice for late taxes, the Duncans said they failed to realize that the loan, unlike most mortgage loans, did not include payments for property taxes. Buried one-inch deep in the paperwork was an "Escrow Waiver" form, mixed in with several other required disclosures.

Now the Duncans have set up the escrow account to pay taxes and homeowners insurance, but their mortgage payments are now $200 a month higher than their total debt payments were before they refinanced.

The Duncans attempted to talk to their lender about lowering the interest rate on their 30-year loan, which could adjust higher after three years. They said the bank offered to raise the 9 percent interest rate to 11 percent, but spread the payments over 40 years.

Under that scenario, the payments would increase. The Duncans have turned that offer down.

The couple say they are angry about the lender not including the $200-a-month escrow payments in the loan, but the Duncans say they realize they have spent themselves into their current crisis.

"We shouldn't have gone so crazy when we moved in here," Elizabeth Duncan said. "We went overboard, way overboard."

She said she hopes others will learn from their experiences.

"Maybe someone else won't make the same mistake," she said.

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