Saturday August 25, 12:39 pm ET
By Dave Carpenter and J.W. Elphinstone, AP Business Writers
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"We thought we were fine," said Connie regretfully. "You never know."
Anincreasing number of homeowners and prospective homeowners are gettingcaught up in the fast-spreading mortgage crisis that is claimingvictims from all income levels and demographic groups. Like the Pents,many are trying desperately to get their loan terms reworked but arefinding it's not possible in a tightened market.
For five years,the housing boom put money in the pockets of lenders, brokers, realtorsand investors and granted easy mortgages to homeowners with both goodand blemished credit. But as home prices decline and interest ratesclimb, the cracks in the housing market's foundation are widening.
Exoticmortgages, once hailed for helping to increase U.S. homeownership toits highest level at 68.9 percent, have become the undoing of an entireindustry and, most heartwrenching, millions of homeowners.
Loanswith adjustable rates, payment choices and loose requirements havetrapped borrowers in too-high payments with few options for escape.Some have taken on second and third jobs, depleted savings, retirementand college funds and wrestled with lenders to stave off foreclosure.Those who fail see their homes sell to the highest bidder at an auction.
"Theincreasing availability of mortgages has been an important and positivelong-term trend," said Doug Elmendorf, a Brookings Institutioneconomist. "But like many positive developments, this one was taken toan unjustifiable extreme."
Many of the victims are subprimeborrowers -- those like the Pents who don't qualify for market interestrates because of blemishes on their credit record. The Center forResponsible Lending estimates that 2.2 million subprime home loans madein recent years have or soon will end in foreclosure.
But there are many other ways to be hurt in the mortgage crunch.
Manyprospective home buyers, through little fault of their own, are havingtrouble getting mortgages because of the changing market.
Otherswere sold on too much house, piled up huge loans based on the inflatedvalue of their property and didn't fully understand the interest ratesthey would have to pay. Now, they are struggling to keep up with thepayments.
The bloodletting won't slow anytime soon as more of these exotic loans reach the tipping point in the next year.
Nearly$1.12 trillion worth of hybrid and traditional adjustable-ratemortgages were originated in 2005 and 2006, while $779.13 billion ofinterest-only ARMs were issued in that period, according to a surveyfrom the Mortgage Bankers Association.
Many of these loansoffered low "teaser" interest rates that will reset through 2009,slamming borrowers with higher rates that could send them intodelinquency if they can't refinance.
Attempts to rework troubledloans will become increasingly common as the crisis picks up speed,said James Gaines, a research economist with The Real Estate Center atTexas A&M University. After all, foreclosure benefits neitherlender nor borrower.
The problem, he said, is that the lender maynot have any authority to redo them because of the way loans are nowbundled and resold, with repayment risk changing hands several times.
"It's unlike the old days where the bank you borrowed from just kept your loan on the books," he said.
DavidDowns, a professor of real estate at Virginia Commonwealth University,believes blame for the current quagmire falls on all involved. But hesays the consumer should be held accountable first and foremost forfailed loans.
"If somebody takes on financial risk, it's incumbent on the consumer to understand that," Downs said.
The Pents grieve losing their three-acre property in the middle of horse country, with its swimming pool and fish pond.
"It was my dad's house," said Connie, 39, an elementary schools receptionist. "It's quiet, it's open -- we love it."
Theirtroubles began in April 2006 when they refinanced the remaining$207,000 on a 30-year fixed loan to a two-year adjustable rate mortgageso they could pay down hefty obligations on their SUV and pickup truck.
Amortgage broker informed them just before the closing that theremaining debt would be $3,500 more than expected, but they signedanyway.
"We didn't have time to change the terms so we just signed them," Connie said.
Aboutthe time the first payment on the new loan came due, a sequence ofevents left them unable to keep up. First Connie's mother moved out andstopped helping out with mortgage payments. Then her husband Timothylost his job at a mobile home factory because of the housing industryslump.
Their loan servicing company first demanded payments, then stopped returning their calls.
Conniewishes the lender and servicing company would have been easier to get ahold of, easier to talk to. But she knows she and Timothy shoulder someof the blame.
"We probably should have been better prepared for it," she said. "When the job goes, unfortunately, so does everything else."
Withtwo adults, two small children and three dogs, Val Rasmussen's14-by-70-foot trailer in Lincoln County, Mont. was crowded. After herhusband, Tom, landed a better-paying job, they decided to sell thetrailer and move into a three-bedroom house near her grandparents.
"This was a pretty major step for us buying a house," the 27-year-old Rasmussen said.
Withtheir trailer languishing on the market, the Rasmussens went ahead withthe purchase with 100 percent financing from First Magnus FinancialCorp.
The family closed on the $159,000 loan last Wednesday withthe big move scheduled for Saturday. But on Thursday morning, FirstMagnus informed them that the loan would not be funded. TheTucson-based lender, which was on track to fund $36 billion inmortgages this year, suspended its operations indefinitely.
"I was a mess," Rasmussen said.
TheRasmussens scrambled to find a new loan, but found no one wasunderwriting 100 percent mortgages anymore. Desperate, the Rasmussensdropped the price of their trailer by $10,000 and found a buyer.
Theyplan to use the money to secure a traditional 30-year fixed-ratemortgage with 20 percent down, but they worry that their buyer couldrun into trouble, too, in the current mortgage market.
"The gameplan is to make sure this guy gets his financing," Rasmussen said. "Thehouse that we bought is just sitting there vacant. This is really hardfor the seller, too, because they put down money on some land. We'reall just waiting, hoping this goes through."
Jeanna and VernonMarshall were renting a home for themselves and their seven childrenwhen the owner decided to sell and gave them 30 days to move. So inJanuary last year, they hurriedly signed what they thought was a$365,000 30-year fixed mortgage on a four-bedroom home in the upscalecity of Henderson, Nev.
After the closing, they realized they hadsigned onto a two-year interest-only adjusted rate mortgage that theycould barely afford, with a payment of $2,923 a month.
"What theydo in escrow is they shove papers two different ways, to both people,like a crisscross," said Jeanna Marshall, 36. "You're signing so manydocuments so fast. I don't know how the ARM slipped past us."
Marshall,who is disabled, receives $1,500 in Social Security payments a month,while her husband Vernon, 41, is a driver for UPS netting about $3,000a month. Last year, however, Vernon's work slowed down and they fellseven months behind on their payments. They tried renegotiating, butthe mortgage companies only wanted more every month. No other companywould refinance the loan because it carried a $20,000 early paymentpenalty.
The house went into foreclosure in May, and theMarshalls are looking for a place to rent. With their oldest now 17,Jeanna is worried about college.
"We're hoping and praying onscholarships," she said. "We hope they can learn so they don't getcaught up in the mess that we did."
After her mother died fouryears ago, Gwendolyn Walkley retired and moved from California to athree-bedroom condominium in Daytona Beach Shores, Fla.
Sheoriginally bought the $299,000 condo with a $100,000 down payment andan adjustable-rate loan with interest rates that would reset after twoyears. At the end of last year, she wanted to refinance into afixed-rate loan to avoid the higher interest rates on the ARM, but herbroker sold her on a "great loan that very few people qualify for," shesaid.
Walkley, 56, had a high credit score in the 730s, she said, and carries no debt, except for her mortgage.
Shethought the loan had an interest rate slightly above 6 percent, makingher monthly payment less than her $1,600 monthly retirement check. Butit turned out that was a "minimum" payment that didn't cover the fullmonthly interest or any principal on the loan. If she wants to pay offthe principal and interest on the loan each month, her interest ratebumps to around 8 percent and her payment to around $1,800. Otherwise,the difference is tacked onto the amount she owes, ballooning her debt.
Walkleyknew the mortgage smelled funny from the beginning when she turned awaya notary the day before Christmas last year, refusing to sign documentsthat showed an 8 percent interest rate. But the broker reassured herthat the interest rate was 6 percent and referred her to tiny writingon one of the document pages.
When the notary returned, Walkley signed, trusting the mortgage broker when he told her not to worry.
Toavoid a swelling principal, Walkley has used all her savings and is nowworking through her stock investments to pay the full interest andprincipal payment each month. She hopes her investments last until theprepayment penalty period expires, two-and-a-half years from now, andthen refinance into a 30-year fixed loan.
Walkley hasn't spoken to her mortgage broker since signing the documents, but she remembers his promise.
"He said 'You're gonna love this loan, trust me,'" Walkley said. "What a line."
SharonReuss of the Center for Responsible Lending, a nonprofit organizationthat works to eliminate abusive practices in home mortgages, says loansthat give borrowers a fixed payment for the first two or three yearsbefore the monthly obligations adjust sharply upward -- dubbed"exploding ARMs" -- have been particularly troublesome.
"What hashappened in the market has been very reckless -- the kind of loans thatin no way take account of people's ability to repay them," she said.
That's what happened to the Fanfan family.
Thethree-bedroom bungalow that Milca and Josy Fanfan bought in 2002 inBrockton, Mass., a blue-collar suburb of Boston, wasn't their dreamhouse. But at $215,000 it was what they could afford for themselves andtheir 3-year-old son Nathaniel.
With subpar credit scores, theFanfans were able to secure a loan from Ameriquest Mortgage Co. with ahefty fixed interest rate of 9.5 percent. The problems began when theirmortgage broker called at the last minute to say they needed to come upwith an extra $8,000 in fees. Then at the closing, they were told theloan would be adjustable-rate, not fixed.
Milca tried to readeverything she signed at the closing to learn how high the rate wouldgo, but she found it impossible as sheet after sheet of paper wasthrust at her.
"I had a gut feeling that this was not good," the48-year-old information technology professional recalled. "They said,'Don't worry about it, just keep your credit clean. In two years, youcan refinance."
But Josy, a self-employed remodeling contractor,lost a finger in an on-the-job accident and was out of work for months.That put the couple behind in payments, and refinancing was out of thequestion. Meanwhile, the mortgage rate kept climbing.
Milca askedthat the loan be reworked, to no avail. Meanwhile, monthly payments onthe adjustable-rate mortgage have ballooned from $1,700 to $3,000.
"I'veheard on TV where the lenders want to work with you," she saidbitterly. "Bullcrap. ... These people are not out to help you, they'reout to take your home."
Milca called her lender almost dailywithout response and piled up attorneys' bills and late fees. She hadproblems sleeping from all the anxiety, and her hair started fallingout.
"Every month it was like 'Is this nightmare going to beover?'" she said. "How could somebody be asked to pay $3,000 a month ona mortgage that's $193,000? That's highway robbery."
Ameriquestspokesman Chris Orlando said the loan was made through an independentbroker and that his company had worked with the Fanfans for some timeto keep them in their home.
After foreclosure proceedings beganin February, Milca was referred by her state bank commissioner's officeto a state-funded agency (Jamaica Plain, Mass.-based ESAC) that fightsunscrupulous mortgage lenders and brokers.
Through ESAC, theFanfans negotiated a rate of 9.5 percent and the right to refinance intwo years. The monthly battle to make payments isn't over, but Milca isworking several jobs to make sure it is won.
"I want people to know they can fight," she said. "Don't be ashamed to cry out for help."
AP Business Writer Ryan Nakashima in Las Vegas contributed to this report.
