Subprime market's decline puts thousands
of Mass. homes at risk
BOSTON (AP) _ The turmoil in the mortgage market for homebuyers with poor credit
history could put tens of thousands of Massachusetts residents at risk of losing
their homes in a state where foreclosures already are spiking.
Monday, March 19, 2007 found at citizen.com
A professor who recently completed his seventh annual study on subprime
lending in Massachusetts believes more than 20,000 of such high-cost loans
originated in the state in the last two years alone will eventually end up in
foreclosure.
Jim Campen, a professor emeritus of economics at the University of Massachusetts
in Boston, said some people in those homes may hold onto them by refinancing or
finding ways to repay debts. But the outlook is grim for many who will have to
sell and either find a cheaper home, rent or end up on the streets.
''For most people in foreclosure, even if they can get good credit counselors,
more often than not they can't be helped,'' Campen said.
The projection of more than 20,000 foreclosures is based only on subprime
mortgages originated in 2005 and 2006. So total foreclosures from subprime
mortgages will likely swell by adding in loans begun in earlier years, when
mortgage banks didn't grant such loans as frequently.
The 20,000 number is based on Campen's estimate of the number of subprime loans
originated statewide in the past two years _ about 120,000 _ and a projection by
the nonprofit Center for Responsible Lending that 17.6 percent of such loans in
Massachusetts will eventually end up in foreclosure.
In light of such projections, Lawrence resident Cesar Mejia feels fortunate his
family isn't out on the streets.
The 58-year-old school maintenance worker bought a two-bedroom home in 1999 with
his wife and disabled son after securing a conventional 30-year mortgage. They
refinanced two years ago to a $190,000 subprime loan to free up cash from home
equity so Mejia could cover medical and funeral costs for his mother, who lived
in the Dominican Republic.
The subprime market emerged to help people get into homes who otherwise would
not have been able to because of poor credit histories. Such loans offer the
chance to buy a home with little or no money as a down payment, but they
typically carry high interest rates or artificially low interest rates that grow
after the first few years.
Mejia's new mortgage carried a higher interest rate that boosted the family's
monthly payment from $1,700 to $2,159, he said. When he faced an unexpected
$15,000 tax bill from the sale of an earlier home, the family fell behind on its
monthly payments.
The lender that offered Mejia the subprime loan ''convinced us to do something
that was not in our best interest,'' he said in Spanish through an interpreter.
''I feel I was deceived.''
The lender threatened to foreclose. But the Mejias refinanced a second time by
agreeing to pay off debts and consenting to a 50-year loan _ a new mortgage
product offering affordable payments but allowing borrowers to build equity only
very slowly.
''We still haven't gotten over the emotional strain from the collection
process,'' said Mejia, who's now on a payment plan to repay utility bill debts.
Such stories are likely to become more common because of this month's rapid
decline in the subprime market _ a consequence of the surging number of
homeowners unable to make payments in a slumping housing market, which has led
financiers to cut off the supply of cash to subprime lenders. Some are now
teetering on bankruptcy.
The problems are expected to fuel even more foreclosures in low-income
communities like Brockton, which led the state with nearly six foreclosure
filings for every 1,000 homes in last year's third quarter. Lawrence and
Springfield both had about four filings per 1,000 homes, and the statewide
average was just under two, according to the Federal Reserve Bank of Boston.
Statewide, foreclosure petitions jumped nearly 70 percent last year, according
to The Warren Group, a Boston-based publisher of real estate data.
Subprime loans accounted for about two-thirds of foreclosure filings in last
year's third quarter, with conventional and government-backed loans accounting
for the rest, according to the Federal Reserve.
Lenders and homeowners are now paying for lax lending guidelines that allowed
people with poor credit to move into homes amid a booming housing market where
financing was readily available, said Kevin Cuff, executive director of the
Massachusetts Mortgage Bankers Association.
''Those lending guidelines were much more attractive then to Wall Street than
they currently are,'' Cuff said. ''In the last 60 days, we have seen a
tremendous resetting of those guidelines. What goes up, must come down.''
Meanwhile, home prices have recently fallen more sharply in Massachusetts than
in other areas of the country. That's left many homeowners with subprime
mortgages unable to pay off debt, since they can't as easily refinance and can't
free up as much cash by selling since home prices are lower, said Mike
Fratantoni, an economist with the Mortgage Bankers Association of America.
Job growth also is slower in Massachusetts than in the rest of the country, and
unemployment is higher. That's created less opportunity for financially troubled
homeowners to earn cash they need to stay in their homes, Fratantoni said.
Although Massachusetts' housing market remains pricey, it's in the middle of the
pack in some respects. The Mortgage Bankers Association of America ranks the
state 26th in the nation in both its foreclosure inventory and its delinquency
rate, reflecting the number of homeowners behind on their payments.
Momentum is growing for government action to ease the surge in foreclosures and
crack down on the subprime market.
Massachusetts Attorney General Martha Coakley said Friday her office planned to
step up enforcement against predatory lenders who lure homebuyers into terms
they can't afford. Coakley also is considering stronger regulations to crack
down on loan originators who inflate consumers' income and obtain inflated
property appraisals.
Such measures are severely needed in low-income communities such as Lawrence,
where about 70 percent of the population is Hispanic and many residents speak
little or no English, said Mayte Rivera, director of the nonprofit Community and
Enterprise Development Center in Lawrence.
''Because a lot of people aren't fluent in English, they don't go to mainstream
banks to inquire about prime loans,'' said Rivera, a graduate student writing a
doctoral dissertation on Lawrence's housing problems. ''Meanwhile, there's
someone in their neighborhood very aggressively promoting subprime mortgages. It
needs to be stopped.''
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