New Century's Borrowers Worry for Homes
ROBERT SIEGEL, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.
MICHELE NORRIS, host:
And I'm Michele Norris. Troubles keep mounting in the riskiest part of the mortgage market. This week, New Century Financial lost its listing with the New York Stock Exchange.
New Century is under federal investigation and thought to be near bankruptcy. Nearly two dozen other companies that offer mortgages to customers with weak credit are in serious trouble. That's because many who took out these often risky loans can't pay them back. NPR's Chris Arnold reports on some New Century customers who have been struggling.
CHRIS ARNOLD: The kids are out enjoying a fluke of warm day, riding bikes and playing in the street in the suburb of Stoneham, north of Boston.
Unidentified Child: This isn't my bike.
ARNOLD: For ten years, Stephen DiPhilippo(ph) has lived in a big seven-bedroom house on the street. He and his father did some of the work themselves building it. They wanted enough space for the whole family.
Mr. STEPHEN DIPHILIPPO(ph): My daughter's bedroom. This is our son's bedroom, and it's an identical apartment downstairs as well from my parents.
ARNOLD: A few years ago, his father was retiring, so DiPhilippo decided he'd get a mortgage and buy the house from him. DiPhilippo does home renovations for a living, so he doesn't have a regular paycheck or salary. He says a mortgage broker suggested a stated income loan.
A lot of subprime loans work this way: you pay a higher interest rate, but you don't need a W2 or often much of any paperwork. The lender was New Century Financial.
Mr. DIPHILIPPO: They quoted me a rate of 5.9 percent.
ARNOLD: Which sounded pretty good until the day before the closing, when he says a New Century representative called him.
Mr. DIPHILIPPO: They said it was going to be going up to a rate of 8.5 percent. Of course, we got very upset. The closing was scheduled for 9:00 o'clock the following morning. We felt they had us over a barrel, and I think they baited us with the lower interest rate and knew all along that they were going to switch the rate on us.
ARNOLD: DiPhilippo says he knows now that he should not have taken that loan, but he felt pressure. His father was in a dispute with the existing lender, and he says a New Century manager told him he could refinance out of this new loan quickly with no penalty. But that wasn't true; the loan did have a substantial penalty if he refinanced, so he didn't. And like many of these subprime loans, after a couple of years, it turned into a monster.
Even mortgage industry groups say the current disclosures are not adequate, and many people don't understand how much their monthly payments can go up.
Mr. DIPHILIPPO: The mortgage started adjusting higher and higher. The payments started out at around $2,300. The highest we were paying, I believe, was over $4,000.
ARNOLD: DiPhilippo says he started falling behind on the payments. He was constantly stressed out and angry about how much he was paying. He says he had to take medication just to sleep at night.
A New Century spokeswoman said the company doesn't comment on individual cases and isn't doing interviews, in part because the Justice Department and the SEC are investigating.
In the end, DiPhilippo was able to refinance into a better loan, but only, he says, after paying tens of thousands of dollars in excess of interest and fees. Other borrowers are losing their homes.
Unidentified Man: Do you solemnly swear that the evidence that you will present in this court will be the truth, so help you God?
Ms. ANGELA MITCHELL: Yes, sir.
ARNOLD: Angela Mitchell was in court yesterday in Boston for an eviction hearing. Mitchell is a mass transit worker; she drives trains on the city's red line. Her condominium was recently foreclosed on after she was unable to pay her mortgage.
Ms. MITCHELL: The thing is that I am a single parent, and I'm here to let the judge know that my intentions are to be moving out, but I need enough time to do so because I have two younger children and I also work a full-time job.
ARNOLD: Two years ago, Mitchell bought the condo for $245,000 with a loan from New Century. She refinanced out of it, but says her mortgage broker pushed her to take another high-interest loan that she couldn't afford. She figured out later that the broker had inflated her income on the application.
Ms. MITCHELL: Well, actually I was horrified. I was like really upset about it. But this is something that these lenders, they do, you know, without the buyer even being aware of it.
ARNOLD: But Mitchell's not your typical buyer who lost everything; in fact, Mitchell actually made money on this whole ordeal. And that's an indication of just how out of control the subprime market had become. When she bought the condo, she essentially put no money down and was given $7,000 cash back. Then, when she refinanced just a year later, a second subprime lender gave her an additional $28,000 cash, even though home prices were sliding. She used that money to pay off her bills, but Mitchell says now that refi-loan was a mistake.
Ms. MITCHELL: This was basically a learning process for me, and it also was a big headache.
ARNOLD: Mitchell says her credit was badly damaged, but many housing applicants say she was lucky. A lot more people lose substantial equity.
Michael Calhoun is president of the Center for Responsible Lending. He says the foreclosures are just starting.
Mr. MICHAEL CALHOUN (President, Center for Responsible Lending): We project that one of out five homeowners with these subprime loans will end up losing their houses. More than 2.2 million families will lose their homes because of these products.
ARNOLD: Industry groups say those figures are exaggerated and that the market will sort this out itself. But advocacy groups are calling for legislation to let people renegotiate high-interest loans. They also want a bail-out fund to help people stay in their homes. Barney Frank, chairman of the House Financial Services Committee, today pledged a new predatory lending bill by year's end. Chris Arnold, NPR News, Boston.
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