Risky borrowing, financial crises mean an increasing number of homeowners face foreclosure
Pam Hannam was hoping for a fresh start when she left San Diego for Idaho after her hair salon went bankrupt almost three years ago.
Since arriving in October 2005, Hannam has purchased a duplex for $127,000, then tried to sell it, only to discover she owed more than the property was worth.
She finally abandoned it to two different lenders, who foreclosed on the duplex in the 1300 block of Ash Street in Caldwell.
Her troubles didn’t stop there. She also had to close a hair salon she opened in Nampa and has moved eight times, including a couple of stints with relatives in Caldwell. For a time she lived out of her Ford F250 truck.
“I moved here with so many hopes and aspirations. And the first day people were flipping me off because of my California license plate,” she said. “How did things go so wrong?”
Hannam’s is just one story among many unfolding in Idaho as homeowners fight to keep their homes out of foreclosure. Some people face losing their homes or filing for bankruptcy because of job losses or health care crises.
Others, like Hannam, got subprime loans meant to put people who ordinarily wouldn’t qualify for a mortgage into a home. Those types of loans take various forms that can start off with a fixed rate, then adjust upward after a specific time. When that happens, mortgage payments can increase by 30 percent or more.
Boise State University business professor Gundars Kaupins said the nation’s dilemma is the result of skyrocketing home appreciation rates combined with lenders who were eager to fund even the riskiest loan.
“There was this element that life would go on like this forever,” Kaupins said.
Idaho is still well below the national average for foreclosures. Roughly 5 percent of all mortgages go into foreclosures, compared to a national rate of 25 percent.
But some experts said those statistics are only headed upward.
Trying to make it work
Hannam did not want to become a statistic.
At one point, in an effort to avoid foreclosure, she tried a “short sale,” where the lender agreed to auction off the property for less than the full value of the loan.
The lender wanted a minimum of $107,000, but the high bid was $99,000 — not enough to solve Hannam’s problem.
After that, Hannam decided just months after moving in to walk away from the duplex and her responsibility to repay the loan.
She felt she was pushed into the deal at a time when she was trying to move forward in her life. One banker said she may have a point.
Credit scores count
Hannam’s credit score when she applied for the loan was 637.
Credit scores — based in part on a person’s payment history and the amount of outstanding debt — range from 300 to 850 points. Most people score in the 600s and 700s. Scores above 700 are considered a sign of good financial health; below 600 generally indicates a person is financially a high risk.
Based on her score, most lenders would not have approved a $127,000 loan on a property in disrepair, especially since she had already filed for bankruptcy in California.
“I don’t know how she did it,” said a local banker, who spoke on condition he not be identified. “I could not have made that loan, even under the most aggressive guidelines we had in 2005. After such a recent bankruptcy, the most I could have gotten her was 80 percent financing.”
That would have required Hannam to put down $25,400 to get the loan and the duplex. She didn’t have it.
The Boise banker admits that at times some lenders bent the rules when making subprime loans because “everybody was making money on these loans.”
Hannam’s loan was an “80/20” loan, which means she actually took out two mortgages, and the smaller loan had a higher interest rate. It’s a financial device ordinarily used to get around paying mortgage insurance and for those who don’t have any money to put down on the house. But if buyers default, they’re on the hook for two mortgages, not one.
“These loans are a big part of the problem,” the banker said. “The loan officer and the real estate agent got what they wanted. But nobody was looking out for this woman’s interest.”
The practice of subprime loans has come back to bite some of those lenders. According to Mortgageimplode.com, a Web site that tracks the subprime market, more than 130 subprime lenders have gone out of business since late 2006.
Leading lender Countrywide Mortgage said last week it had borrowed $11.5 billion from a group of 40 banks to fund loans, a move that shows how deep the lending crisis has become.
Know the danger signs
In hindsight, Hannam said she should have recognized the danger. She said the real estate agent had rushed to close on the house, getting her to sign paperwork on the eve of a holiday. She was sold on the idea of renting out half the duplex to help pay for the mortgage but later learned that rents in the area were too low.
Even when she thought there were too many repairs to make, she was told she could get an equity line of credit. But she couldn’t. What she didn’t know was that to get that line of credit she would need to pay pre-payment penalties that amounted to more than $9,000 on the first loan and almost $3,000 on the second.
To make matters worse, she still needed to make repairs, and her first tenants caused even more damage.
The law prevented her from filing for bankruptcy again, she couldn’t refinance, and she didn’t have the cash. So she walked away.
Hannam’s example is extreme. She didn’t start out with good credit or a financial cushion. But even investors are finding the subprime market was a mistake.
“A lot of people bought these homes as investment properties, and now they’re losing their shirts,” said U.S. Bankruptcy Court Trustee Bernie Rakozy. “They were trying to make a quick buck, and the truth is now hitting them in the rear because the homes were way overvalued.”
Life’s unexpected twists
The foreclosure story also includes people like a Boise couple in their 40s, whose unforeseen circumstances left them desperate.
The couple’s financial problem began when the husband lost his job with a local fence company. They fell nearly two months behind on their house payment. Then the wife was injured in a car accident, pushing their payments nearly three months behind.
“And once you get behind, it’s hard to catch up,” the wife said.
The couple, who did not want to be identified, kept making payments, adding a bit extra in hopes of making up the missed payment. But they discovered that the extra money was actually paying for late fees imposed by the lender.
When a foreclosure notice was filed by the bank in May, the couple were shocked when they began receiving calls from strangers asking them to sign over their deed but stay in the home and pay rent.
Instead, the couple decided to file Chapter 13 bankruptcy, which will put the foreclosure on hold while they come up with a plan to repay the amount that is in arrears.
Statistically, Idaho has not been hit as hard by the implosion of the subprime market as other states.
The number of filings against those Idaho properties rose 91 percent from a year ago, however, indicating that many properties face multiple filings. That ordinarily means the owners have been unable to sell or refinance their loans.
How long Idaho can dodge the foreclosure epidemic is uncertain, said Leonard Rosen, who trains loan officers and mortgage professionals as founder of Pitbull Mortgage School. He predicts that the nation has seen only the tip of the iceberg when it comes to foreclosures, adding that the number could double or even triple.