Lured by the idea of an easy transition from renter to homeowner, Natasha Layne purchased her dream home in Brooklyn with a $650,000 mortgage loan with no down payment and an attractive teaser rate. Less than a year later, faced with comprehensive electrical damage, tenant woes, and a wealth of property damage, Layne and her husband tried to refinance—only to find that no lender would touch the loan. What’s more, with the upward correction of adjustable rate loans, one of their dual mortgage payments—of $3,000 and $1,500—increased by more than $600.
Financially strapped, unable to afford their mortgage, and inundated with foreclosure notices, the couple didn’t resort to a short sale, which would’ve allowed them to sell the house at a substantially lower price than it was worth, they turned instead to their mortgage company, SunTrust Mortgage. When SunTrust refused to restructure their loan or offer another viable resolution, Layne joined countless other homeowners on the front lines of the escalating subprime mortgage financial crisis. “I admit we were unaware of many important points about the home buying process. But when we explained our hardship to SunTrust to get some leniency, we got nothing. Now we have no guidance, no reliable counseling, nowhere to turn, and the foreclosure notices are pouring in,” laments Layne.
SunTrust spokesperson Michael McCornick says there are multiple tools available to assist customers who are experiencing difficulties with mortgages. Options include work-out, short-term forbearance agreements; modified loan agreements; a deed in lieu of foreclosure, where the borrower conveys all interest in the property to the bank in order to satisfy the default loan and avoid foreclosure; or a short sale, where the house is sold for less than the original purchase price. “There is no one fix-all. Each option is applicable depending on the customer’s unique circumstance,” he explains.
With the value of U.S. outstanding subprime mortgages teetering at $1.3 trillion as of March, 2007, more than two million Americans are certain to lose their homes in the expanding subprime mortgage financial crisis. The disaster began in 2006 with the deflation of the previously robust housing market and high default rates on adjustable rate loans and similar mortgage loans that were given to high-risk (i.e., subprime) borrowers—those marked by low income, poor credit history, lack of collateral, and spotty financial situations. Subprime loans are characterized by no down payments, unrealistic
teaser rates and incentives, adjustable rate mortgages (ARM), and lower monthly payments—features that make homeownership affordable and accessible to those who wouldn’t otherwise qualify for a loan.Black and Latino communities shoulder the brunt of this crisis. Clear racial patterns have emerged illustrating that both groups have been systematically targeted in steering and redlining schemes. According to Federal Reserve data, 55% of blacks—compared with 17% of whites—received subprime loans to purchase or refinance homes in 2005, even if they qualified for lower-rate loans. Moreover, many observers claim that government policies, such as the Community Reinvestment Act, strong-armed banks into lending to credit-lacking customers.
But the subprime mortgage financial crisis is far more egregious and complex than unprepared homeowners failing to read the fine print on their loans. To date, it has mushroomed into an unprecedented global problem, impacting nearly every sector of the American economy and claiming casualties from Fortune 500 executives to the next door neighbor. Lisa Rice, vice president of the National Fair Housing Alliance explains, “The lack of federally regulated mortgage lenders and savings and loan and depository institutions, coupled with the advent of Wall Street playing a larger role with mortgage backed securities,
opened opportunities for unregulated lenders to operate an untested, unregulated scheme.” Therefore, subprime lenders, most of whom were federally unregulated, have been aggressively marketing patently unaffordable subprime loans in recent years, mostly because Wall Street buyers were willing and eager to invest in these higher-interest loans for larger payoffs. At the same time, rating agencies gave subprime securities AAA ratings and federal regulators turned a blind eye to this rapidly growing—and ultimately combustible—market.With interest rates on an estimated $600 billion in subprime loans due to adjust upward in 2008, the impact will be far-reaching and devastating to black communities. Increasing numbers of families across the country face foreclosure, auction, and eviction. The spillover effect includes the creation of blighted neighborhoods due to abandoned or foreclosed homes, massive devaluation of property, loss of home equity, and an increase in renting. Stricter loan and refinancing policies will mean that prospective buyers and existing homeowners will feel the pinch, too. “Some states have longer gestation periods for foreclosures because their legal system has a backlog. This means that home losses occur faster in some areas than in others,” says Rice. She advises homeowners affected by the crisis to call 888-995-HOPE for the Hope Now Alliance, a collaborative effort between various mortgage market participants, from counselors to investors to loan service professionals, to assist subprime borrowers with mortgage finance counseling.
The Federal Housing Administration (FHA) recently created the FHASecure plan and new lending policies to help up to 240,000 people with subprime home loans avoid foreclosure. Those whose loans are now in default will be eligible to refinance providing they have good credit histories otherwise, and had been making timely mortgage payments before the interest rates on their adjustable rate loans increased. For more information about FHASecure and other FHA products, call 800-CALL-FHA or visit www.fha.gov or www.hud.gov. For a list of local homeownership centers or an HUD-approved housing counseling center, go to www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.
Rev. Jesse Jackson’s Rainbow/PUSH Coalition has organized a number of protests in New York City, in conjunction with community organizations to galvanize public opinion and encourage a moratorium on foreclosures. Rev. Jackson says, “There is no recourse for homeowners unless there is a plan for the massive restructuring of loans to 30-year loans at a fixed rate. Without federal intervention, the long-term economic repercussions will reverberate across the entire country.”