The New Generation of Homeless

This article in today's Star Tribune newspaper previews the next generation of homeless in America.

For struggling homeowners, help may be too little, too late

The Bush administration has proposed changes in loan rules, but many borrowers can't qualify.

By H.J. Cummins, Star Tribune

The federal government is 0-for-2 with Miguel Salazar for the past week, as he tries to hold on to his north Minneapolis home.

Salazar wouldn't qualify for the first of two Bush administration plans -- a mortgage refinancing program through the Federal Housing Administration (FHA) -- partly because he's not in default on the house he bought four years ago for $185,000.

The administration's second idea -- it's asking companies that administer mortgages to work with struggling borrowers -- is something he already tried. But the loan service "told me they're not a refinance company, that there's nothing they can do, that they expect payments in full and if they don't get them they'll report me to the credit bureaus," Salazar said.

The two administration proposals take aim at a problem that is rocking this country's housing, credit and stock markets: subprime, or risky, home mortgages. Congress is also expected to propose its own variety of solutions, including possible changes to bankruptcy laws to protect home ownership.

About 2 million of these risky loans, valued at more than $500 billion, are adjustable-rate mortgages (ARMs), with interest rates that will adjust upward by the end of next year, according to industry estimates.

"Most people expect delinquencies and defaults to double next year from the current level," said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.

"And for someone who's been put in a house he can't afford and owes more than the house is worth, it's hard to say there are any good options out there."

Help has to come soon for Salazar, 41, after one of his two mortgage payments went up nearly 2 percentage points from the original 7.5 percent, and increased his monthly payment from $960 to $1,600 in July. A full-time social services counselor for Hennepin County, he has already taken a second, part-time job as a bilingual surveyor for a local foundation. He just made his two August mortgage payments -- $1,950 in total -- but he doesn't know where he'll find the money to make September's.

"My credit record is good, but if this goes on it will stain it, and make it harder for me to do anything to fix this," said Salazar, who is married with three children. "It's too scary. I just wanted the American dream for my family."

In Minnesota, foreclosures doubled between 2005 and 2006, to 11,207, according to a study by HousingLink, and in some parts of the metro area they are on pace to double again this year.

Plans, with problems?

President Bush's new program through the FHA, which traditionally has insured loans made by banks and mortgage brokers to qualifying lower-income and first-time buyers, will extend this insurance for homeowners who are in default and looking to refinance.

The program, dubbed FHASecure, adds five extra qualifying criteria, because of the loans' already precarious state. One involves proving that timely payments ended only because of a higher interest rate. Another requires the owner to have at least 3 percent equity in the property -- which would disqualify Salazar, even if he goes into default.

Another big stumbling block is the expensive prepayment penalties of as much as $15,000 on most subprime loans, upfront cash that these borrowers would have to pay to refinance, Cecala said.

The FHA estimates 80,000 U.S. home buyers will qualify for this new help, mostly families that would have taken FHA loans if lenders hadn't steered them to ARMs, agency spokesman Steve O'Halloran said.

With an average value of about $250,000, those mortgages total about $20 billion. That sounds like a lot, Cecala said, but Americans take out mortgages totaling that amount every 36 hours.

The Bush administration also called on loan-servicing companies, hired by the mortgage owners, to modify loan terms for borrowers who are struggling.

More than half of homeowners who go through foreclosure make the mistake of not trying to contact their lenders, said Tracy Morgan, vice president of the Homeownership Preservation Foundation, a nationwide housing counseling agency based in Bloomington. As many as one in five don't even know what kind of mortgage they have, Morgan said.

Others don't expect much success, though, because about three-fourths of subprime mortgages quickly leave the hands of the original lenders, sold in big bundles to anonymous groups of investors whose only interest is the promised profits.

In the old days, Cecala said, a banker could simply agree to cut a struggling borrower's mortgage from $200,000 to $180,000, reflecting a housing market downturn and resulting in affordable payments. But these days, a loan servicing company would have to pluck that $200,000 mortgage from its original bundle, pay investors the full $200,000, and then resell the $180,000 mortgage in a new bundle, absorbing the loss.

Salazar had no luck with his loan servicer, Americas Servicing Co., based in Des Moines.

It is a division of Wells Fargo that services loans, under contract to other lenders, according to Wells Fargo spokeswoman Peggy Gunn in Minneapolis.

Another bank that Salazar recently approached turned down his request to refinance, he said, after his house appraised as low as $178,000.

Salazar said he didn't know that his original loan had an adjustable interest rate until he got word in April that his payment would go up in July.

"You're just so excited about getting the house," he said. "If somebody did tell me, I had no clue what it was."

He hopes that the scale of the mortgage crisis will force government and business to come up with solutions.

"There are other people in this boat, too," he said. "What's going to happen to everyone?"

H.J. Cummins • 612-673-4671
H.J. Cummins • hcummins@startribune.com