nola.com, Posted by Bruce Alpert, Sept. 15, 2007
WASHINGTON -- Like many homeowners, Letitia Youngblood decided in April of 2005 to refinance her mortgage so she could get some extra cash. The move allowed her to make some repairs to her 9th Ward home and create a room to do part-time seamstress work.
But then Hurricane Katrina severely damaged the house. And now the interest rate on her adjustable rate mortgage has passed 9 percent, increasing her monthly payments to more than $800. That's $180 more than she paid when she took out the loan, an amount that leaves her worried she will join the record number of Americans losing their homes to foreclosure.
To make matters worse, she paid her $23,000 Road Home grant to a contractor who was supposed to renovate the home. He disappeared before completing the work, but not before returning some of the appliances Youngblood purchased and pocketing the cash.
"It's been tough," said Youngblood, 52, who is living with a cousin in LaPlace while she works with the community group ACORN to block foreclosure on her home. "When I took out the loan two years ago, the broker said 'Don't worry about the adjustable rate. You'll be able to refinance if the rates go up.' Obviously, that isn't an option now."
The mortgage woes are occurring across the country, particularly in California, Florida, Arizona and Nevada. Many homeowners who took out mortgages, often with a tiny or nonexistent down payment, are watching hopelessly as their adjustable rates increase by two or even three percentage points.
Many can't refinance to get better rates either because of prepayment penalties or because the value of their homes, which were rising for much of the past decade, is now falling. Some people owe more money on their homes than they are worth. For many Katrina victims, the homes that they financed before the hurricane are either destroyed or still in need of major repairs, which makes them poor prospects for refinancing.
Lenders still flexible
In New Orleans, Civil Sheriff Paul Valteau Jr., whose agency handles real estate foreclosures, said that the numbers have been steadily soaring in 2007, jumping from about six or seven a week to 30 or 35 a week and sometimes as many as 45. But the numbers are still below the pre-Katrina foreclosure levels that had been running at about 55 a week, he said.
Valteau said many homes put on foreclosure lists are taken off before the property is seized, reflecting an effort by homeowners to protect their assets in bankruptcy court, or a decision by lenders to put off foreclosure based on homeowners receiving or qualifying for checks from the state's Road Home rebuilding program.
"We're getting a buffer from the national problems because of the Road Home payments," Valteau said. "There's still some flexibility from lenders. What does the lender want with a junk house, especially if a client is getting a Road Home grant and can rebuild?"
Rep. William Jefferson, D-New Orleans, worries, however, that lenders are beginning to end their flexibility with borrowers behind in their payments, or soon will do so, leaving subprime borrowers stuck with higher interest rates they can't afford, combined with limited or no refinancing options.
"We've had various moratoria observed to help people whose homes were destroyed or damaged by the hurricanes from having their homes foreclosed, but they can't be observed forever," Jefferson said. "And I fear that at some point this problem is just going to explode unless we take special care to get people back into their homes with notes that they can afford to repay."
State is vulnerable
The current data paint a mixed picture about the extent of the foreclosure problem in Louisiana.
The state ranks No. 3 in overall mortgage delinquency rates, with 7.29 percent of all mortgage holders in the state behind at least a month in their payments, compared with 9.33 percent in No. 1 Mississippi and 7.55 percent in Michigan, according to the Mortgage Bankers Association.
But the percentage of housing loans that entered foreclosure during the second quarter of 2007 was 0.56 percent in Louisiana, below the national average of 0.65 percent, the association reported.
The state, however, seems particularly vulnerable to future problems because it ranks 44th among the 50 states in the percentage of homeowners with prime mortgages, reserved for people with good credit ratings and which usually come with fixed interest rates. By contrast, the state ranks 14th in the percentage of homeowners with the less favorable subprime loans, generally offered to people with credit problems. Particularly in today's market, subprime loans are prone to sharp increases in interest rates two years after the they were taken out.
Homeowners in the hurricane disaster zone also are facing higher insurance premiums and other increased costs.
On Capitol Hill, Congress is looking at proposals that deal with what to do about the growing rate of delinquency on subprime loans. Nationally, the delinquency rate rose to a record 14.82 percent in the second quarter, up from 13.77 percent during the first three months of 2007. In Louisiana, the rate remained virtually unchanged, 17.67 percent in the second quarter compared to 17.73 percent in the first quarter.
The Bush administration is expanding the Federal Housing Administration mortgage program to help people facing foreclosure. The Department of Housing and Urban Development estimates that the new program, designed for low-income Americans with good credit ratings, will help 240,000 families avoid foreclosure.
"Many hard-working American families, who were able to make their mortgage payments under the initial teaser mortgage payments ... are now struggling to make ends meet because their rates have doubled or tripled," HUD Secretary Alphonso Jackson said. HUD provides a list of options to help homeowners avoid foreclosure at www.fha.gov/foreclosure/index.cfm.
Sen. Mary Landrieu, D-La., said more help is needed, particularly in Louisiana, given the double whammy of escalating adjustable rate mortgage rates and the struggles of rebuilding, even with Road Home grants. She and other Louisiana lawmakers said they're looking at the subprime mortgage overhaul bills now before Congress, and looking for ways to tailor them to Louisiana.
In a letter to Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., the chairmen of the Senate and House banking committees, a coalition of housing and consumer advocacy groups, said that Congress must work to ban incentives for brokers who work against consumer interests: commissions known as "yield spread premiums" awarded for loans made at higher rates than lenders require.
The Federal Reserve, which sets U.S. monetary policy, reported last week that minority borrowers continue to be steered to higher-cost mortgages. African-Americans received high-cost loans 52.8 percent of the time, compared to 25.7 percent for white borrowers. The authors cautioned that the report didn't include the credit histories of applicants, but consumer advocacy groups said the report is indicative of the problems minority neighborhoods face because of limited access to affordable credit.
Legislation targets brokers
Rep. Richard Baker, R-Baton Rouge, a senior Republican on the House Financial Services Committee, said that he fears the Democratic-led Congress will go too far in efforts to deal with the subprime mortgage collapse, perhaps imposing new oversight not only for insurance brokers but for the investment firms that purchase mortgages from banks and other lending institutions as an investment. Such oversight might cause investors to get out of the mortgage business altogether, which would dry up credit resources just as they are needed the most, he said.
Baker's solution: Require more meaningful information to be provided by brokers and banks to borrowers before they sign up for loans. But Baker said that shouldn't be interpreted as an argument for more paperwork.
"People get hit with so much paperwork at closing that they generally don't pay much attention to serious warnings," Baker said. He favors a condensed disclosure form, highlighting the major potential pitfalls such as higher interest rates later and the risk of depending on future refinancing that might not be available.
Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee and a Democratic presidential nominee candidate, is the most recent to offer legislation, proposing that lenders be held responsible for brokers' misrepresentations of loan terms; to bar brokers and lenders from steering a person eligible for a prime loan to a more costly subprime loan; to ban all prepayment penalties and require an analysis of a borrower's ability to repay the mortgage, especially when adjustable rates rise.
The National Association of Mortgage Brokers said that some legislative proposals seem to unfairly target only brokers for more regulation.
"Since 2002, NAMB is the only industry trade group that has consistently advocated for more stringent standards for all loan originators, regardless of where they are employed, in order to protect consumers and curb abusive and predatory lending practices in the mortgage industry," said Denise Leonard, a member of the association's board of directors.
Bruce Alpert can be reached at email@example.com or (202) 383-7861.