Area homeowners squeezed by adjustable rate mortgages

Monday, August 20, 2007

In July, 19 separate legal advertisements were published for foreclosure sales in Cape Girardeau County. This past Wednesday, there were nine more.

Of those 28 advertisements, 25 were notices for the default on mortgage loans issued since 2001. While none of the homeowners named in the ads would speak about their circumstances when contacted, the time period involved corresponds to the period when mortgage companies were making many risky loans. And figures from the county Recorder of Deeds office confirms this year will see a significant rise in foreclosures locally.

While there were 94 trustee's deeds filed in Cape Girardeau County in 2006, this year has seen 76 so far. And many of the 28 foreclosures included in the recent legal notices are not included in this year's figure.

Homeowners, even those with the best credit, are being squeezed by rising payments for adjustable rate mortgages, experts said. And for those who took part in the easy credit world of riskier loans that prevailed in the housing market over the past five years, circumstances can be even more severe.

The resulting shake-out is rocking financial markets across the world as rising numbers of homeowners are unable to pay their loans. The Federal Reserve took steps Friday to quiet markets by cutting a key interest rate and sending signals that additional rate cuts will follow.

Understanding why so many people are struggling with their loans -- and why it has such an impact on worldwide credit markets -- requires understanding the array of mortgage loans now available, said Mark Gorman, chairman of the Missouri Mortgage Banking Association and a partner in Gorman & Gorman Home Loans of St. Louis. The days of dealing with the original lender for the life of a home loan are long gone. Now loans are bundled and sold to investors as mortgage-backed securities.

News stories about weakness in financial markets focuses on subprime loans without explaining very well how those loans work, he said. For example, a lender with a low credit score, high existing debt or a poor loan-to-home value ratio were all candidates for subprime loans.

And those loans had a variety of methods for making people qualify, Gorman said. Some lenders accepted borrowers' claims about their income without verification. Others, he said, offered "negative amortization loans" that started buyers out with a set payment and added extra interest charges to the balance of the loan.

Adjustable rate buyers got hit the worst, he said. Whether the debtor was a high or a low risk, adjustable rates have in many instances doubled the cost of paying interest. Borrowers could get a loan that started at 4 percent in 2003, Gorman said, and the rate on that loan now is likely to be 7 1/2 percent. On a $200,000 mortgage, that change would add $583 a month to interest charges.

"When lending guidelines started tightening, people who counted on refinancing found they couldn't and their loans were adjusting," Gorman said. "They had the choice to sell and take a loss or allow it to go to foreclosure. But they couldn't afford to stay."

But adjustable rate loans aren't all subprime loans, Gorman said. A prime loan fits specific guidelines laid out by Fannie Mae and Freddie Mac, two federally chartered home-loan underwriters. Such a loan can be for up to 100 percent of a home's value, with a maximum loan of $417,000, and can have an adjustable rate, Gorman said.

Another type of loan, called a nonconforming loan, may not fit some of the guidelines. For example, the loan may exceed the $417,000 limit, he said.

Gorman doesn't hide his disdain for some of the practices that have hurt his industry's reputation. "With subprime loans, there has been quite a bit of fraud in the industry, not just with mortgage companies but with real estate appraisers, title companies and real estate agents," he said. "A lot of people had their fingers in the pie."

The good news for parts of the Midwest and many more rural areas is that the problem doesn't seem as severe and the foreclosure rates aren't as high as those in other locations. "It is pretty much universal, and there is an impact from the East and West coasts and in the urban areas," he said. "That is where the big money is. Rural areas are impacted, but not as much."

Many local foreclosures are handled by the St. Louis law firm of Milsap & Singer P.C. The firm specializes in the home-loan default business.

Even a notice of a trustee's sale, the method for concluding a foreclosure in Missouri, doesn't always result in a foreclosure, said Vernon Singer, head of the law firm.

Singer's firm comes on the scene "as a last resort," Singer said. "The loan company has attempted to work something out with the borrower and the effort has failed. We continue to reach out to the borrowers and look for ways to save the borrower and put them in touch with the mortgage company so the borrower can stay in the house."

Singer said he doesn't want to be seen as the villain in foreclosure dramas. "Sure, it is a tough business to be in," he said. "I don't know that people make us out to be the bad guy." In a lot of cases, he said, "we are able to put people in touch with lenders and we don't end up proceeding."

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Area foreclosures

The recorder of deeds offices in Missouri counties don't keep a separate count of foreclosures. When a creditor takes control of a property, they file a trustee's deed transferring the property. There are other reasons for filing trustee's deeds, recorders said, but the numbers are small, so most trustee's deeds represent foreclosures. The number of trustee's deeds filed in recent years in area counties:YearCape GirardeauBollingerPerryScott
200776 1316182

Note: 2007 figures as of Wednesday. Scott County figures inflated by numerous fraud cases currently under investigation.

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