Mortgage miseries sending more homeowners into foreclosure

CHICAGO -- Beth Johnson and the U.S. economy both were on a roll in 2000, when she bought her first home.

Sudden medical bills and a shrinking economy, though, wrecked her financial plan and dried up the job market, resulting in missed mortgage payments and an agonizing year on the brink of foreclosure.

"Money just got tight," said the 25-year-old Mankato, Minn., resident, who works in customer service at a telecommunications company. "I got physically ill thinking about not having my home."

Similar troubles are puncturing the American dream nationwide. Even with mortgage rates at record lows, delinquencies are increasing and home foreclosures have climbed to all-time highs.

According to data released this month by the Mortgage Bankers Association of America, 0.4 percent of loans entered foreclosure in the second quarter and another 1.23 percent were in the process -- both unprecedented in the 30 years the group has kept track.

The biggest culprit: rising unemployment, with sinking stock portfolios, illness and easy financing all contributing.

The north-central United States, including layoff-hit manufacturing areas, topped all regions with 0.47 percent of loans entering foreclosure in the second quarter.

But the trend has left no area untouched. The South had the most mortgage problems as measured by payments 90 days or more overdue, nearly 1 percent, while Nevada, Pennsylvania and Utah also were trouble spots.

All types of borrowers have succumbed -- from six-figure earners who defaulted on $300,000 jumbo loans to first-time home buyers taking advantage of low rates to squeeze into a house.

The mortgage group's chief economist, Doug Duncan, says the main reason is the recession, which cost 1.8 million jobs and shrank many paychecks.

Also blamed is the proliferation of nontraditional loan programs.

More liberal lending practices have helped boost U.S. home ownership to 68 percent of all households, up from 63 percent a decade ago. But experts say some of the innovative loans, including ones for 97 percent and even 125 percent of the home's value, are showing cracks under the stress of an economic downturn.

"If Joe Sixpack can only scrape together 3 percent of the value of the home or less and has to borrow the rest, he's got no cushion if he loses his job or gets divorced," said James Croft, executive director of the Mortgage Asset Research Institute.

Not unlike when stocks started plummeting, mortgage problems have stirred panic among borrowers and increased demand for financial counseling.

"They're scared they're going to lose their house," said Melinda Wright, education director of Consumer Credit Counseling Service of Central Indiana, which doubled its typical mortgage delinquency workload to 30 appointments last month. "And they're blaming themselves. They say, 'I should have known better."'

At "Ask Susan," an Internet financial advice column compiled by nonprofit Money Management International, foreclosure has recently become the most frequently asked-about topic, says Kim McGrigg, the column's co-author.

Still, experts say there's no cause for national alarm. San Francisco-based Loan Performance, which tracks mortgage loan data monthly, says foreclosures and delinquencies may be flattening and recent loans are performing well.

But that's scant comfort for people like Johnson, who ran into trouble making payments on her two-bedroom home after her son had ear surgery last year. She fell three or four months behind, struggled to pay other bills and finally got help from a foreclosure prevention program at Lutheran Social Service of Minnesota.

"I had a lot of anxiety, took medication for that. You get dragged down and really depressed," she said.

Loretta Cardonia, 42, has been fighting to save her home in Houston since shortly after her husband was laid off last year. With debts and missed payments mounting, she borrowed from her 401(k) plan but remains four months behind. When the phone rings, she fears it's another foreclosure warning.

"I didn't think this was possible," said Cardonia, a pricing manager at a grocery store. "It just takes a certain event and it seems to put you in a downward spiral."

As she seeks help and another loan, the nightmare has taught Cardonia some lessons: Manage finances better and make mortgage payments first, even at the expense of other bills.

"I've learned that no matter what, I'm going to pay the house payments first," she said. "I don't want to lose the house."

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