In the News
Mortgage defaults rise with debt load
Delaware home buyers take on riskier loans
Ted Griffith
The News Journal, March 19, 2006
Gordon Clark feels like his home is slipping out of his grasp.
"I worry about this all the time," said Clark, who lives in Houston, near Milford. "I don't know what's going to happen."
Over the past five years, an increasing number of Delaware homeowners, especially Kent County residents like Clark, have had to face the risk of losing their properties to foreclosures. Statewide, the number of homeowners against whom lenders started foreclosure proceedings climbed to nearly 2,200 in 2005, up 52 percent from five years ago, according to a state-sponsored study.
Statewide statistics aren't available for how many homeowners lose their properties and how many are able to keep them by working out payment plans with their lenders.
There's no single explanation for the rise in foreclosure filings, but experts say the problem appears to be linked with ballooning amounts of mortgage debt taken on by home buyers. Unlike in the past, when borrowers had to come up with 20 percent down payments, buyers today can take out loans for more than 100 percent of the home's purchase price, said Jackie H. Milton, a housing counselor with the nonprofit Neighborhood House in Wilmington.
Such loans allow buyers to get into homes, but they also make for higher mortgage payments, which increase the risk for foreclosure down the road, said Milton, who works with homeowners trying to stave off foreclosure.
Kent County has seen the biggest percentage rise in foreclosure proceedings initiated against homeowners, with filings up 215 percent in the past five years, according to a study being conducted for the state by The Reinvestment Fund, a Philadelphia nonprofit group that tracks lending practices.
New Castle County, which accounts for about two-thirds of the state's population, has seen foreclosure filings climb nearly 50 percent, while Sussex County has seen a 26 percent increase during the past five years.
Kent County Sheriff James A. Higdon, whose office oversees the sale of foreclosed homes at monthly auctions, said the increase is attributable, at least in part, to growth. About 12,000 people moved into Kent County since 2000, making it the state's fastest-growing county, according to U.S. Census Bureau population estimates. The county's population grew by 13.3 percent from 2000 to 2005, compared with 12.1 percent in Sussex County and 4.2 percent in New Castle County.
But population growth is not the only factor in the foreclosure rise. Higdon also expressed concern that lenders are granting mortgages to people who can't afford to make the payments.
"I hate to blame the mortgage companies, because they're just trying to make a living, but it seems like almost anybody can get a mortgage these days," Higdon said. "There are people who get low interest to start, but after two years it goes up and they can't afford it."
Several factors blamed
Maggie McCullough, an assistant director with The Reinvestment Fund, said she couldn't pin down the primary cause of the rise in Delaware because her group's study won't be completed until the late spring. Delaware hired The Reinvestment Fund late last year to conduct a study on foreclosures throughout the state. Concerned about the rise in foreclosure filings, state banking officials are hoping the study will help them better understand the causes of the increase and help them come up with ways to reduce foreclosures.
McCullough said a 2004 study done by her group on a similar increase in Pennsylvania found that so-called subprime lending played a big role in setting homeowners up for foreclosures. Subprime lending refers to granting mortgages to consumers who wouldn't qualify for the loans under conventional standards because they have spotty payment histories or because they are already carrying too much debt. Subprime loans accounted for more than 60 percent of loans in foreclosure in Pennsylvania, according to the study.
Housing advocates worry that foreclosures could climb higher in Delaware and nationally because many home buyers in recent years have taken on adjustable-rate mortgages, which have low initial interest rates that move up sharply within a few years. Unlike traditional, fixed-rate mortgages, which have the same interest rate for the life of the loan, rates for adjustable mortgages change as interest rates rise or fall.
A recent national study estimated that nearly 1.5 million homeowners who took out adjustable-rate mortgages in 2004 and 2005 will be at high risk for foreclosure when their loan rates jump up. In some cases, mortgage payments could double, according to the study by First American Real Estate Solutions, a Santa Ana, Calif., real estate market research firm.
A report released Thursday by the Mortgage Bankers Association showed late mortgage payments nationally climbed to a 2 1/2-year high in the last three months of 2005. The association attributed the rise partly to the financial squeeze of adjustable-rate mortgages.
"I feel like we're just on the cusp of this," said Patricia Kelleher, who oversees housing assistance services provided by the YWCA Delaware. "The foreclosure problem could get a lot worse."
Quick action crucial
To combat foreclosures, state banking official Gerard W. Kelly plans to hold workshops this spring to educate consumers about how to keep their homes. Kelly, the deputy bank commissioner for consumer affairs, said homeowners should take action as soon as they receive a notice about being behind on payments.
Lenders sometimes are willing to work out compromises, so-called forbearance agreements, which temporarily reduce or delay mortgage payments. But the chances for reaching such an agreement go down the longer a homeowner delays responding to delinquency notices, he said.
Mortgage lenders will send notices if a homeowner misses a single monthly payment, but the lender typically doesn't file suit in Superior Court until the mortgage is at least three months past due. Once foreclosure begins, the lender starts racking up thousands of dollars in legal fees, which must be paid by the homeowner to keep the house.
"You have a rougher time saving a house, once the foreclosure process starts," the deputy bank commissioner said.
Lenders need approval from a judge before a home can be sold at the monthly sheriff's sale. Foreclosure can take as few as six months, said Douglas B. Canfield, executive director of the Legal Services Corp. of Delaware, a nonprofit group that provides free legal assistance to low-income residents.
Filing for federal bankruptcy protection can put a hold on the foreclosure process. But even then, homeowners must still make mortgage payments, Canfield said.
Help available
Nonprofit housing counseling agencies throughout the state will help homeowners negotiate forbearance agreements and fill out the necessary paperwork. The housing counseling services are offered at no cost.
New Castle homeowner Cheryl Kelly is working with the West End Neighborhood House, a housing counseling agency in Wilmington. Kelly said she and her husband, Patrick, hope Tulsa, Okla.-based BancOklahoma Mortgage Corp. will allow them to pay off thousands of dollars in back payments gradually. The lender has sent delinquent payment notices, but hasn't initiated foreclosure. Kelly said they ran into financial trouble after she was laid off from her job as a computer-assisted designer and had to take a lower-paying job in a call center.
"My advice to anybody who also finds themselves in this situation is: Don't wait to get help," she said.
In addition, "prepurchase" education provided by housing counseling agencies can cut the risk that home buyers will run into foreclosure trouble, said Brenda J. Dryden, a housing counselor with Neighborhood House. Dryden said it's essential that people know the basics of budgeting and home maintenance before they make purchases.
"We want people to be able to buy homes, but we also want to make sure they can stay in their homes," Dryden said. "There's nothing gained if you get into a home in 2006 and then you're going out in 2007 because you can't pay the mortgage."
Clark, the Kent County homeowner, said he didn't know about the free help provided by housing counseling agencies until months after his lender had started foreclosure proceedings. He said he was deluged by calls from businesses claiming they could help him, but he said he believes they wanted to take advantage of him, figuring he'd be willing to sell his home for a bargain price.
"Once your house is under foreclosure, you have people coming out of the woodwork, trying to scam you," said Clark, who works as a technician at a Milford manufacturer.
He said his situation has improved to some extent since he started working with the Georgetown-based First State Community Action Agency, which is among the agencies in the state that helps homeowners at risk of foreclosure. But he still must come up with $8,000 in back payments and fees.
"I'm not in the clear yet," Clark said.