Borrower, beware: Debt disaster looms as rates rise on easy-money mortgages
Seattle Times staff reporter
TOM REESE / THE SEATTLE TIMES
JIM BATES / THE SEATTLE TIMES
JIM BATES / THE SEATTLE TIMES
TOM REESE / THE SEATTLE TIMES
Helpful Web sites to learn about how to buy a home, obtain and understand your credit report, and shop for a good loan include:
If you would like help reviewing loan documents before you sign, or are facing foreclosure, assistance is available without charge through Solid Ground, a Seattle nonprofit. To talk to a mortgage counselor, phone 206-694-6766 on Monday or Wednesday between 10:30 a.m. and 4:30 p.m.
-- Lynda V. Mapes
• Shop around. It's worth taking the time to get the best deal you can on a debt you will be paying off for decades.
• Don't allow anyone to rush you. Take all the time you need to understand the terms of the deal.
• Know your credit score and what it entitles you to. You may be eligible for a much better loan than is being offered.
• Insist on answers to your questions. Don't be shy about asking for explanations of words or procedures you are not familiar with.
• Be sure to obtain a complete set of the final documents.
• Review the documents before you sign them. Are your income, debt and assets accurately recorded? Are the interest rate and repayment terms what you agreed to?
• Don't provide your signature on any blank documents.
• By law, you have three days even after signing the documents to back out of any deal. It if doesn't feel right, it probably isn't. Walk away.
• Review the proposed loan with family and friends.
• Check the closing costs. Are they what you agreed to?
• Notice the fees. What are they for? Are they what you agreed to?
• Buyer, beware. Don't assume the lender is on your side or trying to help you.
• Don't take on debt you can barely afford. Buy something cheaper or wait until your finances are more secure.
-- Lynda V. Mapes
Subprime mortgage: A loan with a higher interest rate, charged by lenders to cover the higher risk of lending to borrowers with shakier credit and finances.
Adjustable-rate mortgage: A mortgage on which the interest rates and payments may change as often as every month.
Prepayment penalty: A fine paid by the borrower to the lender if the borrower pays off the loan in full ahead of the agreed-upon schedule.
Balloon payment: A payment for the balance of a mortgage after a period of low payments at the front end of the loan.
Negative amortization payment: Payments that cover none of the principal of a loan and only part of the interest due. The unpaid interest is added to a borrower's debt, which gets bigger instead of smaller over time.
Interest-only payments: Payments that cover the interest on a debt but none of the principal.
It was a sweet little house, with affordable day care nearby for their 6-year-old son. Patrick Fultz and Laurel Swartz were hooked.
But when the couple — with no savings and about $20,000 in credit-card debt — shopped for a mortgage to buy their 1,200-square-foot house in Tukwila last year, they heard the same thing from lenders and in a home-buying class they attended: Forget it.
"You basically had to be Scot free, no massive credit debt, which we had, and to have money in the bank, which we didn't," said Swartz, 31. "How do people buy houses in America anymore?"
With school starting soon, the couple didn't want to wait to buy their first house. "And of course online and on the radio it's like, 'Oh, you can get a place without putting any money down.' "
Fultz thought he had found just what he was looking for when he came across Gold Mortgage Lending in Renton on the Internet. "No income verification mortgage, zero down," read the firm's Web site. "We fund mortgages the others can't."
Gold Mortgage specializes in loans called subprime mortgages, which allow people with high debt or poor credit to buy a house or refinance a loan at a higher interest rate than people with better credit or less debt.
That's come at a cost to people like Fultz and Swartz, and the cost is becoming apparent on a national level. Subprime mortgages were sold with the promise of low initial payments. After the low introductory period expired, lenders are cranking up the adjustable rates to eventually exceed mortgages rates — in the 6 to 7 percent range — paid by homeowners with good credit.
Owners struggling to meet even the original payments are falling behind. Predictions are that nationally, up to a million homeowners could lose their homes through foreclosure. Now some who were thrilled to take advantage of easy lending are wondering if they're the ones who got taken. The sales contracts are often complicated and carry steep fees.
But a look inside the world of subprime borrowers and lenders shows it's not that simple.
As the industry tightens up, scores of small mortgage companies have gone under and many more are at risk, victims of their own business practices.
Erin Rearden, a mortgage counselor at Solid Ground, a nonprofit social-service agency in Seattle, said the deal Fultz and Swartz struck is typical, especially as the cost of housing skyrockets out of reach for so many.
"They wanted a home. And a lot of this comes from operating under the assumption that owning a home is an inherent American right. So when someone offers a way to do it, you want to go for it," she said.
"But if something sounds too good to be true, it probably is."
One house, two loans
Fultz makes $12.75 a hour driving a fish-food delivery truck. He recently paid off half of the 12 credit cards he used in buying a motorcycle, a couch and a television, going out to eat, "just buying stuff," Fultz said. "I had no idea this credit-card debt was going to have such huge repercussions."
Swartz was working at an insurance office, where she made $11.75 an hour.
After so much discouragement, Fultz said he found Kathy Mills at Gold Mortgage helpful and friendly. She drove over to pick up Fultz, who didn't have a car at the time, to get the paperwork started. When the couple went on vacation in New Jersey, Mills dispatched a notary locally to get papers signed to keep the deal moving.
"I was like, here is somebody who can help me," Fultz said.
The couple signed two mortgages to buy their $246,800 house in July. The first loan, a so-called pick-a-payment loan for 80 percent of the deal, had a variable interest rate. The second mortgage, at 12.5 percent interest, covered the rest. The deal included a pre-payment penalty on the first mortgage, and a balloon payment on the second.
Not long after they signed the loan, Swartz decided to dump her sedentary office job to become a personal fitness trainer. The new job paid less, $7.89 an hour, but she had the opportunity to earn commissions as she brought in clients.
The commissions, however, didn't materialize. At the same time, the interest rate on the first mortgage went up, from 7.06 to 8.15 percent — and it can go up every month until topping out at 11.5 percent.
Suddenly the couple were $300 a month short of paying their bills.
Worried, Fultz went to see a mortgage counselor. He said it was Rearden at Solid Ground who told him that the lowest available payment on his first mortgage — the only one he can afford — is a so-called negative amortization payment. It doesn't even cover the interest on the loan. Instead of gaining equity, their debt was growing, with unpaid interest tacked onto the principal every month.
"I had no idea the interest was going to climb like it is — they didn't tell us that at all," Fultz insisted. "Maybe I wasn't listening. Maybe I'm not good at words. Negative amortization? I never even heard of that."
Meet the broker
Mills specializes in clients like Fultz and Swartz. At it for 17 years, she caters to people with bad credit, low incomes and no savings.
"Hey, babe, it's Kathy, " Mills said on a recent workday, dialing up one of the dozens of lenders she says she works with regularly to hook her clients up with a loan. Mills is adamant that she explained the terms of the deal to Fultz and Swartz, just as with her other clients.
"We do this with all varieties of people, all nationalities, every brain level," Mills said. If anything, she remembered the lengths she went to, talking the couple through the deal. "They were very high maintenance," said Mills, swiveling in her leopard-print office chair.
She sees herself as serving a real need for borrowers struggling month to month with their bills, who want a home of their own, just like everyone else.
"I feel sorry for anyone who can't get into a house," Mills said. "We beg the banks to give us their turn downs. I help people; that's the bottom line."
Borrowers obtain financing some can't get any other way — and a home of their own. Making less-than-interest or interest-only payments can also free up cash they can invest, use to pay down debt, or just plain spend. Brokers and lenders profit on the deal, too, through loan fees and interest payments.
It can all work, as long as nothing goes wrong, such as an illness or job loss, and if the house keeps appreciating in value. That way, even though the debt is actually growing, the home's value grows faster, so the borrowers can still come out ahead when they sell. That's the gamble, anyway.
But today, people like Fultz and Swartz aren't the only ones having money problems. Mills, and brokers like her, have troubles of their own.
A meltdown in the subprime lending market is drying up the money pipeline.
Across the country, where home values are stalled or plummeting, lenders are watching loans turn upside down, with mortgages grown larger than property values. People behind in payments are losing their homes. Entire neighborhoods in parts of the Midwest and California are shuttered by bad debt.
The situation is nothing like that in Seattle, where increasing home values can still grease the mechanics of subprime deals.
But even here, lenders have stopped serving subprime clients or are imposing tighter requirements to qualify, from higher credit scores to a couple of months' worth of payments in the bank and at least some money down.
"For my clients, that is a deal killer," Mills said. "My clients don't have any money."
The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.
"I didn't make my own mortgage payment this month," Mills said in April. "But nobody feels sorry for me."
Nor does she feel sorry for Fultz and Swartz, Mills said.
"We didn't do anything wrong," Mills said of her firm. "She quit her job and now they can't make their payments. Well, I didn't make mine this month, either. How do you help someone like that? I wish I could help myself."
When Fultz went to Solid Ground for help, the agency referred his situation to Melissa Huelsman, a Seattle attorney who specializes in subprime loans.
Reviewing documents Fultz and Swartz provided, Huelsman concluded the couple's credit scores should have qualified them for a better loan, with a lower interest rate, especially on their second mortgage. She also found it odd that several different applications for the loan reported varying income levels, even on documents faxed the same day.
Asked about that, Mills said, "We only write down what the borrower tells us." For his part, Fultz said he never reviewed his final loan documents or looked to see what Mills wrote down.
Huelsman said she found some of the documents incomplete and confusing.
Based on what she knew so far, Huelsman said, "I don't think there is any way in the world they could have understood what they were getting into."
Asked about the forms Huelsman questioned, Mills said, "I agree, it isn't explaining it in full." But Mills said she makes up for that as she talks to borrowers: "It's explained to the client 47,000 freaking times."
Fultz and Swartz are working with Solid Ground to try to get a better deal on their loan.
Meanwhile, it's crunch time. They fear falling behind in payments but don't want to sell the house or lose it in foreclosure. They are managing to stay current with their payments so far.
But next month, who knows? Fultz said. "These next couple of months are going to be make it or break it."
Lynda V. Mapes: 206-464-2736 or firstname.lastname@example.org
Copyright © 2007 The Seattle Times Company