Mortgage Lowdown

The last decade has been a good time for the housing industry, the mortgage loan industry and for people belonging to the lower economic strata of society. The housing boom during this period helped a large number of people take homes, which they otherwise may not have been able to afford.

And the fact that minority home ownership rates rose above 50 percent for the first time in 2004 is a laudable fact. But before we go into a back-patting mode, let us look at the deeper and murkier part of this entire story. Behind this success lies a disturbing trend. In the past few years areas with large poor and minority populations in places like Cleveland, Chicago, Philadelphia and Atlanta have experienced a sharp rise in foreclosures. In some cases, these have more than doubled. According to a recent report, black people in Cuyahoga County were nearly 3 times more likely than white people to have received a high-interest mortgage loan last year, regardless of how much they earned. And this is just the foretaste of the can of worms that was opened thanks to recently released federal data.

What then happens is that communities like Blacks and Latinos are unable to pay the high rates and more often than not, the story ends in foreclosure. What’s sad is that this cycle is not going to end anytime now. According to experts, this is only the first wave of financial distress and there is more to come. And the culprit in all this is the subprime mortgage, which initially seemed like a godsend and has now become a nightmare for the minorities.

Baltimore is witnessing a disturbing trend. Agreed, the number of foreclosures in the city dropped more than 8 percent over a four-year span. However, a new study shows that the rate of foreclosures compared to the number of homeowners in the city was almost twice that of Philadelphia. This trend has cost the city $1.8 billion.

This trend is causing great concern among the city agencies, housing groups, lenders and nonprofits. So they decided to come together and launch a new initiative to help people facing foreclosure. They also hope to sustain Baltimore’s momentum in boosting its roster of homeowners with this move. Baltimore.bizjournals.com reports:

Prospective homebuyers will get access to independent counseling on the costs of homeownership and spotting fraudulent real estate practices as part of the effort launched by Mayor Martin O’Malley and a new group called the Baltimore Homeownership Preservation Coalition. Homeowners threatened with foreclosure will be able to call 311, the city’s One Call Center, where operators will connect them to trained counselors and refer them to housing aid organizations.

Read more: City’s high foreclosure rate spurs hotline, counseling

Are non-traditional mortgages good? Many people would have us believe that they are a prime cause of ruin and that if not managed properly, they can lead to your financial doom. Nothing could be further from the truth! Consumers today are an educated lot. They know the options available to them and make an informed choice when they go in for interest-only loans instead of traditional mortgages.

The best thing about an interest-only loan is that it gives you flexibility. During the first decade of your loan period, you can get away with paying only the interest part of the loan. That means, you get this long period to build up on your finances and allocate them to more necessary expenses that deliver better rates of return.

I know this is news that comes from a really far off place, but the fact is that distances don’t change people and that we are not alone in our mortgage sufferings. Recently, the Reserve Bank in Australia noted that there has been a recent increase in the number of people behind on their mortgage payments. Abc.net.au reports:

The central bank also says Australian households have adopted a more cautious approach to their finances, with consumer spending rising broadly in line with incomes. The Reserve Bank is challenging banks and other lenders to avoid a further erosion of credit standards as they chase business in a competitive home loan market.

Read more: Increasing number of mortgages in arrears, says RBA

We are such a gullible lot that it doesn’t take too much effort on the part of a unscrupulous lender to fool us. This happens especially when lenders advertise rates, where they get away with all kinds of what most people would call "smoke and mirrors". Townhall.com reports:

Instead of advertising a rate that is under the market and stating it will cost one point (one percent of the loan, which is used to buy down the rate), they will smile and tell you the APR instead. They will not advertise a rate of 5.75% with a cost of one point, they will say 5.75% with an APR of 5.99%. Did you know that meant you were going to have to pay a point? Probably not.

Read more: Words today don’t always have a meaning

I recently read about a couple, the Wolfes, who purchased a home they couldn’t afford. Now I know what you are thinking… “What’s so unique about that? Just about everyone’s been doing that”. Well, yes you are right. A large, too large for comfort, number of people took loans they could ill afford and are now ruing it as they find it difficult to repay them. However, this senior couple had more than just this much of bad luck. They took this house because their agent promised guaranteed financing. Many predatory lenders resort to this trick wherein they tend to loan money to people with bad credit with the express purpose of taking their home.

Now that they had fallen prey to this lender and realized that they couldn’t make payments on their mortgage, they decided to sell off their home and move to a smaller, more affordable home. A real estate company contacted the Wolfes and sent them a form to sign. The company claimed that this would expedite the sale of their home. The couple was expecting to save some money from the profit of the sale. What the Wolfes didn’t realize was that they had signed the last page of a quitclaim! This meant they had lost all rights to their house and the profit from the sale — a profit of $125,000!

By the way, if you’ve fallen prey to such a lender, you don’t have to panic. You do have legal recourse. While each of the individual steps these companies take are generally legal, when you look at the whole picture, the deal becomes what the court system calls “unconscionable”. All you need to do is get in touch with the attorney general’s consumer protection division.

I know you’ve heard the warning that it is not good to ignore payments on mortgage loans and that you could lose your home, blah, blah… Well, we all know this fact, but there is another pressing fact — lack of funds or funds not being sufficient enough to stretch through the month. In such and other circumstances, you may be forced to miss a home payment.

What should you do when you miss a payment?

• The first thing to do is NEVER try to ignore it — one missed payment is the first step of a downward spiral that could end up with you losing your home.
• Next, immediately call your lender and inform them, and explain the reasons for missing the payment.
• Thirdly, try to come to some arrangement with the lender: you could make the payment the following month or in installments if it is a large sum.
• If you think you still cannot handle the payments, you need to sit down with your lender and discuss other options like for instance a new payment plan with a lower sum.

Most people who own a home first think of cashing in on their home’s equity when in need of funds. There are two ways you can cash in on your home — you could consider a second mortgage or a home equity loan. The problem arises when you cannot decide which of these types of financing will be beneficial to you. It actually boils down to your exact needs and your repayment capacity.

If you have a one time big expense to cover, you are probably better off with a second mortgage. However if you have recurring expenses, then you might not want a second mortgage because a home equity loan will work out better for you. The second mortgage is best for large amounts of money at once while recurring expenses like tuition are better paid for with a home equity line of credit. Bestsyndication.com reports:

You will also need to consider your ability to repay and which option will suit you best. A second mortgage can be financed similarly to your first mortgage, while the home equity loan can be paid back more like a credit card.

Read more: Second Mortgage Vs. A Home Equity Loan

Are you planning to refinance your home for a lower rate, or probably with cash out? You can either shop around for a refinance, or if you cannot or don’t know how to, you could get yourself a mortgage refinance advisor. Bestsyndication.com reports:

By allowing no more than four loan officers or mortgage brokers to assess your situation, you are putting yourself in a much more ideal situation. Especially if your credit is challenged or your situation is unique, not only will the mortgage refinance advisors’ expertise come into play, you will be in a position to compare rates and pricing.

Read more: Finding a Mortgage Refinance Advisor

According to recent reports, Katrina-related delinquencies have dropped to 37 percent of December 2005’s peak of $269.8 million. They however remain 3.5 times higher than pre-storm levels, according to Fitch’s latest U.S. CMBS loan delinquency index, which fell four basis points to 0.55 percent in August. Blackenterprise.com reports:

One basis point of the delinquency rate decline is attributable to the addition of seven new deals totaling $8 billion to Fitch’s deal universe. The remainder of the decline is due to loans becoming less than 60 days delinquent, being paid off, defeased, or liquidated and therefore dropping out of the delinquent universe.

Read more: Katrina-Related Mortgage Loan Delinquencies Falling