Beware of 'Liar's Loans'

Jackson Administrative Assistant Carolyn Bell, who financed her Ridgeland home through New Century Mortgage—now called Carrington Mortgage Company—bought her home in 2006 with a fixed, introduction teaser rate, and her monthly payment is $1,008. The adjustable rate of the loan is kicking in this month, however, bringing with it the possibility of a $1,400 monthly mortgage payment. Bell knows she can't afford the new rate and doubts she will be able to re-finance before it takes effect.

"On the loan form, it said the rate would jump in 2008 from 9.75 to 'adjustable.' They expected me to refinance after two years, but because it … was hard to keep paying on time, we didn't qualify to re-finance," Bell said.

A number of Jackson residents share Bell's predicament, according to Mississippi ACORN, a residents' rights organization that announced its national "Stop the Foreclosure" Campaign in central Jackson last week.

The problem is considerably more rampant among Jackson minorities such as Bell, who is black. ACORN's report, "Foreclosure Exposure: A Study of Racial and Income Disparities in Home Mortgage Lending in 172 American Cities," shows high-cost loans made up a significant proportion of the home refinance loans made to minorities. In 2006, 77.8 percent—more than three out of four—home refinance loans made to blacks were high-cost loans; while almost 67 percent home refinance loans made to Latinos were high-cost loans. Only 42 percent of whites, however, saddled themselves with high-cost loans.

"The foreclosure rate is tearing at this whole country, threatening to make a hit on the whole national economy, but the people who feel it first are the hard-working families who now risk losing their homes because of unaffordable adjustable rate mortgages," said Mississippi ACORN head organizer Sonya Murphy.

Murphy called ARM loans "predatory sub-prime loans" and said the organization is working to counter the national and local increase in home foreclosures they are fueling.

Bell said the foreclosure pressure is stressful. "We were constantly telling them that we can't afford to pay the existing note, and we need to get a lower payment in order to be able to afford our monthly note, and they're like, 'ask your relatives, friends, ask everybody in the world (to help with your payment) but, I'm like, we've really exhausted our resources. We're both working full-time with three children who will now lose their home because of our financial situation."

The nation's housing market was in a bubble during the last seven years, with many overly optimistic lenders treading the dangerous waters of adjustable rate, interest-only or stated-income loans, sometimes called "liar's loans." Borrowers, who would not have qualified for a mortgage loan in earlier years due to low income, high debt or rotten credit, managed to secure these sub-prime loans, sometimes through unscrupulous lenders.

What sounds like a fit of generosity pans out to be the borrower's undoing, however. Adjustable rate loans, for example, regularly come with an artificial introductory percentage rate averaging between 7 and 10 percent. Borrowers accept the loan in the knowledge that the interest rate is tied to the Federal Reserve Bank's prime rate, and has been stable only for an average of two years. When the prime rate rises, so do ARM interest rates.

Lending agents advise borrowers to secure new loans before passing their two-year grace period, often adding that rising home values will grant the borrower instant equity with the next home appraisal. Appraisals aren't what they used to be, though, and many homeowners suffer the specter of negative equity after the first two years, owing more than their homes are worth. Or worse, the borrower has missed a payment and becomes automatically ineligible for a new loan through the same lender.

Negative equity is, itself, a devastating blow in the wash of the exploding housing bubble. More than 18 percent of households that took out mortgages in 2006 have negative equity—with property values continuing to slump in more than one-third of the country. At least half the cities in the U.S. are suffering declines in home prices, according to major mortgage lender Countrywide Financial.

Borrowers find themselves locked into the first ARM loan, and facing down the ineluctable variable rate increase. The resulting spike in the borrower's interest can be more than 3 percent—paltry sounding perhaps, but serious business when monthly payments jump from $990 to $1,300.

Adjustable rate mortgages have led to an increase in delinquencies and foreclosures nationwide. Information from the Mortgage Bankers Association's National Delinquency Survey for the first quarter of 2007 reveals delinquency rates for sub-prime ARMs up from 14 percent to 16 percent.

Homeowner Ira Patricia Smith bought her home in 2006 with her son, Timothy Smith. Smith said her adjustable rate mortgage, financed through Homecomings Financial, has been too much for her and her son to handle over the last two years.

"We've experienced too much hardship to make our high-cost payments in the last five or six months," said Smith, at a Sept. 5 ACORN press conference at her home on Conti Street, in central Jackson. "With the crib death, and then my mom died, there has been tremendous hardship on us, but our lender says we're not eligible to re-finance. We'll have to wait two full years. Hopefully, ACORN can help us renegotiate a financing agreement."

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Here's a blog entry I did last year on predatory lending to homebuyers.



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