The Mortgage Crisis In MN

I wanted to continue with my previous blog about the foreclosures here in Minnesota and Kare11’s coverage on them. The very next night, they had another story on this and I wanted to tell you about and also wanted to give you some very good insights having to do with your mortgage.

They interviewed two different people, one a single man and the other a family, both about ready to loose their homes due to foreclosures. According to Alexa Milton of the non-profit ACORN Housing organization, “The spike in foreclosures has been huge in the Twin Cities.” ACORN reports that the foreclosures on residential properties in Hennepin County more than tripled in between 2000-2006. There were fewer than 1,000 in 2000 and in 2006, there were over 3,000.

There is some truth in the thinking that foreclosures are a minority problem or a lower income problem, but foreclosures are also spreading to the more affluent areas as well.

In Ramsey County, the number of foreclosures in 2000 were 300, rising to 1400 in 2006. This quadrupling of foreclosure rates also happened in the counties of Anoka (214 to 900), Washington (100 to 429), Scott (54 to 300) and Dakota (159 to 860).

The family that was interviewed refinanced their home in 2005 to pay off some bills and reduce their debt. The husband was going to college still so they needed every penny they could. They signed up for an Adjustable Rate Mortgage (ARM) that their rate was locked in for 2 years. They had originally wanted a 30 year fixed mortgage but their broker told them they didn’t qualify for it.

Now, I’m going to take a moment here. It is so impossible to dissect their situation in the way that it was presented here. Clearly, I don’t think their mortgage broker educated their clients to the fullest extent that they could have. Or, maybe they did and the clients just only heard what they wanted to. There are only three people that know this for sure, the clients and the mortgage broker. The fact of the matter is this, if you qualify for a mortgage, it doesn’t matter which program you choose, ARM or 30 year fixed or what have you. What is most likely the case in this situation is that the payment for the 30 year fixed was much higher than the ARM product, so the mortgage broker knowing that the family wanted to reduce their payments, introduced them to the ARM product.

In the news spot, they go on to say that this mortgage is now costing them an arm and a leg and their home. How can they say this? The customers certainly had the right to refinance their home after the fixed rate period was over so that they could lock in their rate. They also said they didn’t realize that their rate would adjust after 2 years. I’m not sure if this interviewer has ever been to a mortgage closing or not but those closers at the title companies really hammer it in to the customers everything about the ARM mortgages and when things will happen. Again, I think what we have here is denial on the part of the customers.

They did go on to say that there was a pre-payment penalty if the customers refinanced. Most often, in the case of pre-payment penalties, it would be a two year ARM with a two year pre-payment penalty or a 3 year ARM with a three year pre-payment penalty. More often than not, a pre-payment penalty could be absorbed into the loan as well. If this mortgage broker had any scruples at all, they would offer to help pay part of it as well for not properly informing their customers. This pre-payment penalty is also something that is covered in great detail at the closing.

The most unfortunate thing for this family is that the appraisal that was done on their home in 2005 said their home was worth $268,000 and so they mortgaged $240,000. After speaking with several realtors, they now feel their home is worth $225,000. The news spot blamed the mortgage company for over inflating the value of the home but did they forget what this article was all about? It’s about all of the foreclosures in these areas. In fact, they mentioned a home in these folk’s back yard that was just sold on foreclosure. Don’t you think that has some effect on the value of your home? I know for a fact that homes in 2005 were gaining much more value than they have been since. Some homes, and it sounds like this one might be one of them, might have even lost value.

Again, it’s hard to say if the appraisal was over inflated or not but as a mortgage broker, I have no control over how much an appraiser values a home at!! We have to justify every comparable home to the lender that we are selling the deal to as well. I think it’s pretty difficulty to over inflate a value by that much. I think I can beg and plead with my appraisers that I work with and they might have to dig really deep to find some other comparables that the lender will approve but I have never seen someone come up with an extra $38,000!! Maybe an extra $1,000 or two but again, it has to be justifiable!!

They also talked about how many loan applicants are being deliberately deceived. Is that really the case or are people really just looking for scapegoats here? Just because I’m honest, doesn’t mean that everyone is but I think the media has a big role to play here and they aren’t doing anyone any favors by this kind of reporting only half of the story.

Another part of the story was taking on the stated-income loans. These are loans where you state that you make so much per month instead of having to prove it. Most often, these types of loans are used for the self employed borrower. Mainly because when you are a W-2 employee (you work for someone else and they take your taxes out for you), you get to use your gross income (your income before taxes) to qualify for your loan. If you are self employed, you have to use your net income (your income after taxes and ALL deductions). How is this fair to the self employed person? There are a lot of expenses that a self employed person can deduct for that the W-2’d person has the same expenses (like car expenses) but because you are self-employed, you have to qualify after those deductions.

The stated income loan is also for people who have many different streams of income such as the single man that they interviewed. He’s a music teacher and he also gives private lessons. Unfortunately for him, he ran into a bad mortgage broker. His mortgage broker stated his income at $10,000/month when in all actuality, it was only $3,000/month. So, when is ARM started adjusting, he too could not afford the payments. He stated that it was like someone trying to explain the theory of relativity to him so he just sat there. Again, who’s to blame for this??? You need to take action if you don’t understand something!! I make sure to explain things to my clients in a way that they can understand things, without using all of the mortgage terms. I ask them several times if they understand thing and let them know that there’s no such thing as a stupid question!!

Both of these different sets of people got into what’s called a subprime mortgage. These are higher risk mortgages and carry higher penalties and restrictions. That being said, again, how could that appraisal been inflated by so much if there are so many restrictions on these loans? They also said that these subprime loans are believed to be largely responsible for the flood of foreclosures. It’s estimated that 80 percent of subprime borrowers can only afford the fixed year rates, when the rates start to adjust, the customers start to go under.

Every customer that I’ve ever put in one of these loans, we’ve always talked about the road to credit repair and how important keeping things on track are. We’ve also always talked about what it’s going to take to get out of that mortgage and what they need to do to help themselves. I can only do so much but they need to get involved with the process as well to have a steak in it. I’ve always been able to get my customers out of these loans before the adjustment period was over and after the pre-payment penalty period.

When a lender forecloses on a house, the average cost to them is around $58,000!! Do you think now that they WANT to foreclose??? Lenders must repurchase loans that default in the first 180 days. The staggering amount of these defaults has put a number of major lenders into bankruptcy or out of business. Since many of those lenders were publicly traded, there is a ripple into Wall Street. Since mortgage loans must be dealt with on a case-by-case basis, it’s not clear yet what the exact impact is going to be on Wall Street.

One major mistake in the reporting of this article was that they interviewed a mortgage broker and said that the customer has a full three business days to review the paperwork before it funds (or is made legal). While this is true on a refinance, it is not true on a purchase. This is a major distinction that must be made. This is why you must have a knowledgeable and trustworthy mortgage broker who will work with you.

The woman mortgage broker that they interviewed also agreed with me that these ARM loans are generally for people not to stay in them. You need to continually stay in contact with your client and your mortgage broker to be sure that things are being done so that when it does come time to refinance and get out of this loan, you can.

So, what can you do if you are in need of help? Well, if you live in the Twin Cities, you can call 311. It’s just like 411 or 911. I’ve not called it myself but I just might have to try it out. Also, call your lender. Put your pride aside and tell them the entire story, don’t leave anything out Call me, maybe I can do something to help as well, maybe give you a number of someone you hadn’t thought of yet. There are ways. I’ve always been fond of the saying, “Where there’s a will, there’s a way. If you’ve got the will, I’ve got the way.” Make it happen, you can do it!!

Sorry this was such a long one today.

Wishing you much success!!

Beth Riegger
To find out more information on how to increase your credit score, click here.