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Adjustable-Rate Mortgages Fuel Foreclosure Crisis


Hear NPR's Scott Horsley

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.


And I'm Melissa Block.

More and more homeowners are in danger of losing their homes after falling behind on their mortgage payments.

Today, the Mortgage Bankers Association reported that new foreclosure filings hit an all-time high this spring. And trouble in the credit market since then has likely made things even worse.

In a couple of minutes, we'll talk with a realtor in one of the trouble spots in California.

First, NPR's Scott Horsley has the national picture.

SCOTT HORSLEY: The mortgage bankers say the defaults are heavily concentrated in seven states. Three of those — Michigan, Indiana, and Ohio — have been hit with heavy job losses.

But chief economist Doug Duncan says the other four — California, Arizona, Nevada, and Florida — have a different problem.

Mr. DOUG DUNCAN (Chief Economist, Mortgage Bankers Association): What's going on in these four states is, first of all, they tend to have very high levels of adjustable rate mortgages.

HORSLEY: And when those mortgages adjust up, some people can't make the payments.

Gabe del Rio is with a counseling service in San Diego called Community Housing Works. A couple of Saturdays ago, he held a workshop for people in trouble with their mortgage and 70 families showed up.

Mr. GABE DEL RIO (Homeownership Director, Community Housing Works): I would say that if we tried to do that last year, we might have three or four families. So what it says is that the communities around are in major distress and really crying out for help.

HORSLEY: On his desk is the file for one family whose first and second mortgages have just adjusted sharply higher.

Mr. DEL RIO: And they're seeing a really large increase, twenty-nine hundred dollars is now going to forty-two hundred dollars. So that's somebody who - you now, we would try with this person to - because they were current before the adjustment, to go back to that original rate, and fix it at that for the rest of the term.

HORSLEY: Some lenders will agree to a lower, fixed-rate payment if the alternative is no payment and foreclosure. Earlier this week, federal regulators issued new guidelines encouraging lenders to consider that kind of assistance.

If lenders won't budge, though, Del Rio says borrowers will need help refinancing into a new mortgage, especially if they owe more than their home is worth.

Mr. DEL RIO: In those cases coming in with a new first mortgage that's stable, that the borrower and the homeowner can afford, you know, that's going to really help a lot of people.

HORSLEY: Mortgage insurance from the Federal Housing Administration would make that kind of refinancing easier. But the FHA can only guarantee mortgages up to about $363,000. And that excludes a lot of homes in high-cost markets like San Diego. So Congress will consider raising the limit.

Fannie Mae and Freddie Mac might also be able to provide money for refinancing, but only if the government-sponsored agencies were allowed to hold more mortgages on their books. The Bush administration has been reluctant to permit that. But Democratic Senator Charles Schumer hopes that might be changing.

Senator CHARLES SCHUMER (Democrat, New York): A good compromise would be to allow them to lift the portfolio caps but only for specific loans that would go to homeowners about to go into foreclosure.

HORSLEY: Schumer also wants more money to pay for counseling distressed homeowners. But Gabe del Rio of Community Housing Works says no amount of counseling will keep some people in their homes. He points to one family who falls hundreds of dollars short of meeting their mortgage each month, even before their adjustable rates go up.

Mr. DEL RIO: Generally, those people have fallen prey to a pushy, overbearing loan originator who wanted to close a loan. And these families get caught up in the dream, thinking that equity's going to increase and they can always sell.

HORSLEY: Del Rio says families like those — maybe a third of those who contact his agency — are better off walking away from their homes and moving back to rental properties they can afford.

Mr. DEL RIO: It's really tough as a counselor to have to tell the real truth to everyone. And sometimes that's tough love that we have to provide.

HORSLEY: The nation's housing market is likely to get more of that tough love this year and next as nearly two million adjustable mortgages reset.

Scott Horsley, NPR News, San Diego.

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