Sunday, April 22, 2007
Mainers are finding it harder to keep their homes, as many people become squeezed between loans they cannot repay and lenders who are offering fewer financing options.
The rate of delinquency on mortgages statewide rose 0.76 percentage points during the final three months of 2006, the second-highest rate of increase in the country, according to the Mortgage Brokers Association. Nearly 5 percent of all Maine home loans were past due, with 2.11 percent seriously delinquent, meaning they were either more than 90 days past due or in foreclosure.
In the subprime market -- loans for people with marginal or poor credit histories -- the numbers are worse. MBA's survey found that 8.3 percent of those loans in Maine were seriously delinquent in the final quarter of last year and 14 percent were past due.
These numbers suggest that many Mainers, who have one of the highest rates of home ownership in the country, are struggling to make their mortgage payments amid a slack economy and flat -- in some cases declining -- home values.
Maine's experience reflects a national trend of more people falling behind on their mortgages and facing the very real threat of losing their homes.
"You have loans happen that should not happen," said Will Lund, who heads Maine's Office of Consumer Credit Regulation. "There's no doubt that we will see an increase in foreclosures."
Lawmakers in Augusta and Washington are rushing to force lenders to tighten their standards for loans and limit the kinds of mortgages that can be offered, hoping that the problems caused by foreclosures can be confined to the finance industry, without spreading to the broader economy. But for individuals who are in the most dire straits, these stricter rules may shut off one popular method for buying time and forestalling foreclosure: refinancing the loan.
For most of the decade, the hot housing market meant home-owners easily could refinance their homes. Many took on larger mortgages in order to tap into the equity they'd built up.
Some of these homeowners took out adjustable-rate loans, figuring that they could simply refinance again before the rates went up. And many of those refinanced loans were made in the subprime market, to people who might not have been able to afford a conventional, fixed-rate loan.
Lenders have developed a variety of loans that appear to offer easy terms for those viewed as credit risks. In the end, however, these products often set up borrowers for financial hardship.
The loans include 2/28s, which offer a low rate for the first two years and then adjust upward, sometimes every six months, over the next 28 years. Other loans allow borrowers to pay only the interest for an initial period, leaving the principal untouched and causing "payment shock" when the full bill kicks in. There are even some loans that allow the borrower to set the payments for the first few months, which usually results in more unpaid interest piling up and even higher monthly bills later.
HIDDEN COSTS
Donna Gillette's case illustrates how easy it is for a mortgage to become a major financial problem.
The 63-year-old L.L. Bean employee said she started looking for a house in early 2006 and quickly found one that she liked in Sanford.
The price was $165,000 and the real estate broker, she said, suggested she see a loan officer at Residential Mortgage Services to arrange financing.
Her credit, Gillette said, "wasn't in the cellar, but it wasn't spiffy either."
The loan officer said she could get an adjustable-rate mortgage, with no money down and a starting interest rate of 8 percent. Papers were quickly brought to Gillette to sign, and she left the office feeling like everything was set.
A few days before the closing, though, the loan officer told her that the rate had to go up, to 10 percent. After a few years, Gillette learned, the interest would rise to between 11 and 16 percent.
"I was already emotionally tied to this house," she said, and went along with what the loan officer told her, including picking up some papers she needed at a commercial lender in Kennebunk.
It turns out the Kennebunk papers included a note for $30,000, due in six months, unless she paid $900 twice a year to renew the note.
Gillette said she had no idea why she needed the note and was further amazed when her loan officer said she could get some cash back at the closing.
She later found out that the loan papers had listed her income as $60,000 a year, when it was half that, and that she was putting $21,000 down on the house, when she wasn't putting anything down.
Gillette said she ended up with initial payments of $1,274 a month, which she could barely make, that would soon jump to $1,400 and then $1,500.
Gillette eventually found help at Legal Services for the Elderly in Scarborough, where staff attorney Mary Kathryn Brennan said it was difficult for even a lawyer to sort out what Gillette had for a mortgage.
"It took me two weeks to figure out what had actually happened," Brennan said. "I was sitting here with these loan documents, thinking 'Where did this money come from? How did they come up with this figure?' "
Eventually, Brennan, Gillette and RMS officials sat down and refinanced Gillette's loan at 5 percent interest, fixed, for 30 years. But, Gillette pointed out, her house is occupied by her son and daughter-in-law, who are helping her meet the mortgage payments.
Gillette sometimes stays there, or with friends, or even sleeps in her car while working two jobs to pay the bills, including the loan on a new car she needed to commute to her job in Freeport.
'BAD LOANS ARE MADE'
James Seely, the president and chief executive officer of RMS, said he subsequently fired the loan officer, has reworked another 10 mortgages that the officer wrote and is working to refinance two others because the terms were so poor.
"The essence of the problem in our industry (is that) in good times, bad loans are made," said Seely, who noted that he's limited his portfolio in subprime mortgages to about 4 percent of his volume because of the growing problems borrowers have in meeting payments.
Seely said he would welcome more state regulation of the mortgage-lending industry.
"It's the easiest state in New England to get a license," he said of Maine. "I think there needs to be more liquidity and stricter licensing requirements on the part of the state."
A proposal likely to be introduced this week and backed by House Speaker Glenn Cummings, D-Portland, includes a number of measures to curb predatory lending, largely by requiring greater disclosure so borrowers have a better sense of what they are getting in a loan and what fees are being charged. It also gives Maine regulators more tools to go after lenders who abuse the system.
Legislators have, in the past, erred on the side of not limiting consumers' credit options, but they have seen in recent months where that can lead, Lund said.
"People realize that letting the market work in pretty much an unorganized atmosphere gave too much power to the lenders and the loan officers," he said.
Lund said he hopes the Legislature gives him greater oversight powers, even while he recognizes that tightening the credit market will cost some homeowners their houses because they will no longer meet the standards for a refinancing.
"If these measures are put in place, some of the people who are getting loans today will not be able to get loans," he said.
FORECLOSURES' RIPPLE EFFECT
Carla Dickstein, vice president of Coastal Enterprises, a private, nonprofit community development agency, said the growing number of foreclosures carries an impact beyond the families losing their homes. For instance, neighborhood property values around foreclosed homes are pushed down, and the growing number of repossessed homes on the market also affects the broader real estate market by increasing inventories of homes for sale.
Those who say the new loan products make it easier for more people to own their own home ignore the fact that the benefit is often only temporary, Dickstein said.
Subprime mortgages made up 14 percent of all home loans in Maine last year, she said, but 66 percent of the foreclosures were on homes financed by borrowers with subprime loans. Since 1998, she added, Maine had a net loss of 3,477 homeowners in the subprime category.
The state has a responsibility, Dickstein said, to stop a cycle that is costing more Mainers their homes.
"The lack of oversight is just incredible," she said, "and I don't agree that you just keep this treadmill going."
Measures that lead to that individual pain might be the only way to attack that larger problem, Dickstein said.
"You don't solve this problem by giving people loans that they really don't have an ability to repay," Dickstein said. "There are huge public interest costs to this, and we don't solve it with more loose money chasing another badly underwritten loan."
Staff Writer Edward D. Murphy can be contacted at 791-6465 or at:
Reader comments
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a binding legal document having enormous legal/financial implications, before signing it.
She trusted someone she should not have trusted and is being hurt for hurt. I honestly feel sorry for her. However, the majority of fools who got involved in sub-prime loans were greedy speculators. Pressured by realtors and the media into believing that actually working, saving and investing prudently, is a "suckers bet", and that housing is the way to riches, the average Joe speculated by buying properties they knew they couldn't afford, by expecting to flip them to some greater fool, rent them (at a negative cash flow!), or bet that future appreciation would allow them to cash-out and keep the game going. Homeownership became the tech stocks of 2000, why work when you can get rich off of housing? The talking heads are promoting a sub-prime bailout (a purely political move which they know if actually implemented easily bankrupt the country), they don't have the slightest idea how these loans even work.
Mainers like to say "it's different here", so do Floridians, Californians, and people in other markets. It's not "different here", housing is going to go through an unprecedented devaluation of enormous breadth and depth. We are only in the second inning of the decline.
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