Mortgage Mess Hurts Main Street, Beyond

The walls are bare, the closets are empty, and Connie and Timothy Pent and their two teenage children are living out of boxes as they wait for a dreaded knock at the door of their three-bedroom house in Ocala, Fla.They've fallen behind in payments on a their home loan, and their lender told them in July that foreclosure was imminent."We thought we were fine," said Connie regretfully. "You never know."An increasing number of homeowners and prospective homeowners are getting caught up in the fast-spreading mortgage crisis that is claiming victims from all income levels and demographic groups. Like the Pents, many are trying desperately to get their loan terms reworked but are finding it's not possible in a tightened market. For five years, the housing boom put money in the pockets of lenders, brokers, realtors and investors and granted easy mortgages to homeowners with both good and blemished credit. But as home prices decline and interest rates climb, the cracks in the housing market's foundation are widening. Exotic mortgages, once hailed for helping to increase U.S. homeownership to its highest level at 68.9 percent, have become the undoing of an entire industry and, most heartwrenching, millions of homeowners. Loans with adjustable rates, payment choices and loose requirements have trapped borrowers in too-high payments with few options for escape. Some have taken on second and third jobs, depleted savings, retirement and college funds and wrestled with lenders to stave off foreclosure. Those who fail see their homes sell to the highest bidder at an auction."The increasing availability of mortgages has been an important and positive long-term trend," said Doug Elmendorf, a Brookings Institution economist. "But like many positive developments, this one was taken to an unjustifiable extreme."Many of the victims are subprime borrowers — those like the Pents who don't qualify for market interest rates because of blemishes on their credit record. The Center for Responsible Lending estimates that 2.2 million subprime home loans made in recent years have or soon will end in foreclosure.But there are many other ways to be hurt in the mortgage crunch. Many prospective home buyers, through little fault of their own, are having trouble getting mortgages because of the changing market.Others were sold on too much house, piled up huge loans based on the inflated value of their property and didn't fully understand the interest rates they would have to pay. Now, they are struggling to keep up with the payments. 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-rate mortgages were originated in 2005 and 2006, while $779.13 billion of interest-only ARMs were issued in that period, according to a survey from the Mortgage Bankers Association. Many of these loans offered low "teaser" interest rates that will reset through 2009, slamming borrowers with higher rates that could send them into delinquency if they can't refinance. Attempts to rework troubled loans will become increasingly common as the crisis picks up speed, said James Gaines, a research economist with The Real Estate Center at Texas A&M University. After all, foreclosure benefits neither lender nor borrower. The problem, he said, is that the lender may not have any authority to redo them because of the way loans are now bundled 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. SOURCE OF THIS STORY