New Hampshire foreclosures jump as 'exotic' loans' rates adjust

By SHAWNE K. WICKHAM
New Hampshire Sunday News Staff
Sunday, May. 6, 2007

Hundreds of New Hampshire homeowners are losing their homes to foreclosure, victims of a nationwide crisis within the "subprime" mortgage industry.

And experts say it's going to get worse before it gets better.

"We're in for a Nantucket sleigh ride," declared Ben Niles, past president of the Mortgage Bankers and Brokers Association of New Hampshire.

He explained the metaphor: Picture a whaling ship that has just harpooned a whale. "The harpoon would stick and the whale would take off and take them for a ride. That's a Nantucket sleigh ride."

And that's sort of what's happening within the subprime lending industry, Niles said. "The damage is done. People are in mortgages they should never have been in, whether it's their fault or someone else's fault, and there's no easy way out."

"It's compounded by the fact the market's oversupplied and flat, so it's hard to sell a house today. And, depending on your loan-to-value-ratio, it can be hard to refinance."

Peter Hildreth, the state's banking commissioner, just returned from a regional conference where federal regulators told state banking supervisors they expect home foreclosures to peak this fall.

"This is the beginning of the beginning," Hildreth said. "It is very scary stuff."

How we got here

Just two years ago, the housing market was booming, and lenders were offering a variety of "exotic" products to get new buyers into homes: interest-only loans, 100 percent financing, adjustable-rate mortgages with temptingly low introductory rates -- even "negative amortization" loans, with monthly payments that didn't entirely cover the interest, let alone touch the principle. And many people "consolidated" other debts into their adjustable-rate mortgages, lured by low "teaser" rates.

Now, as their introductory interest rates adjust upwards and their monthly payments skyrocket, many New Hampshire homeowners are finding themselves unable to make their new payments. And home foreclosures are increasing dramatically.

Troubling numbers

According to Real Data Corp., which publishes The Registry Review, there were 140 foreclosures recorded in New Hampshire in March alone, more than double the 67 recorded the previous March.

It's a disturbing trend. There were 157 foreclosures in January of this year (compared to 79 the previous January), and 130 in February (up from 41), according to Real Data Corp.

And the Mortgage Bankers Association recently reported that while subprime adjustable loans made up only about 8 percent of the mortgages written in New Hampshire in the last quarter of 2006, they represented nearly 60 percent of the foreclosures in that same period.

Unlike the housing slump that hit the state and led to foreclosures in the late 1980s, Niles said, this crisis is "product-driven rather than economically driven."

George Helwig, director of home ownership programs for CATCH Housing Services in Concord, said the current crisis grew out of a push to extend credit to a previously untapped segment of the market: people with impaired credit. Many lenders lowered the standards for debt-to-income ratios to get people to qualify.

"You take people who are already on the edge, then take too much of their income, and it goes over," said Helwig, who worked as a consumer and mortgage banker before joining the nonprofit CATCH.

"Most lenders should have known, and I think the legitimate lenders did know and didn't get into these products that would get people in trouble," he said.

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Sarah Mattson, a staff attorney with New Hampshire Legal Assistance, said her office in just the first three months of this year has received 39 calls from people facing foreclosure.

"Sometimes people are able to manage it for a while, but then something unexpected comes up, a medical expense or a car repair, and then all of a sudden there isn't the ability to keep up with both," Mattson said. "Something unexpected can really throw the car off the track."

And a growing portion of NHLA's foreclosure practice involves people who have been ensnared by "foreclosure rescue scams," she said.

Peter Wright is director of the Consumer and Commercial Law Clinic at Franklin Pierce Law Center in Concord, which also is seeing more clients who fell victim to predatory loans.

Wright said many of these homeowners say lenders assured them they could simply refinance their adjustable-rate loans to fixed-rate mortgages before the new, higher rates kicked in. But when they try to do so, he said, they discover "they're not eligible for those because of their credit score or a past bankruptcy or a foreclosure."

"They're subprime borrowers, and they are targets for these predatory lenders."

Richard Gaudreau, a Salem attorney who specializes in bankruptcy law, warns the picture is about to get even worse. He calls negative amortization mortgages "the real time bomb that's ticking in this whole process."

Under those loans, he explained, monthly payments are kept artificially low, even after the interest rate adjusts upward; the additional amount due keeps getting added to the principal loan amount -- up to a point.

But once a predetermined cap is reached, typically 125 percent of the original amount borrowed, the loan transforms into a fixed-rate mortgage for the full amount. And that, Gaudreau warned, "is going to double or triple some people's mortgage payments when that occurs."

That's about to happen to one of his clients. "She's making good money, but it's not enough for these types of loans. And once the 125 percent cap hits, she's going to lose that house."

Fighting back

Gaudreau said he is pursuing truth-in-lending cases for several clients.

Several attorneys interviewed said they've also had some success in forestalling foreclosure proceedings by having clients file bankruptcy. That may buy some folks time to work out new repayment agreements with their lenders, or to sell their homes and pay off their high-priced loans. But the attorneys caution it may be too late for some borrowers to work out deals.

That's why Banking Commissioner Hildreth urges homeowners who have adjustable-rate loans to contact their mortgage companies now to find out when those loans will reset, and how much the new payments will be. And if you can't afford that, he said, "You need to take affirmative steps before it resets and you go delinquent."

Hildreth said the state banking department can help consumers contact their mortgage companies and work out repayment plans. "If they're a legitimate company ... they're going to be more willing to try to work something out, because they don't want to own the property."

But, he stressed, "The time to do it is before you're in trouble."

Gaudreau predicts that new regulations and safeguards will come out of the current mess. But he said they won't be in time for those New Hampshire homeowners currently facing foreclosure or bankruptcy.

Meanwhile, as if the foreclosure crisis weren't enough to worry about, Hildreth has another concern.

"We don't have enough affordable housing as it is," he said. "So if we have this rush of what one person called a tsunami of these foreclosures, where are (the victims of foreclosure) going to live?"

"It could be quite an impact on the state."

 

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