Many paying a price for easy credit

Sunday, April 22, 2007 BY LINDA STEIN

Two years ago, when the housing market was booming, William Soodul figured he would reduce his costs with a “creative mortgage.”

He took out a $226,500 adjustable-rate mortgage on his A-frame home in Allentown with a 1.8 percent interest rate and monthly payments that were not applied to either the principal or the interest. His plan was to refinance before his interest rate rose and higher payments kicked in.

But Soodul, a 61-year-old self-employed title insurer, got the surprise of his life when he tried to line up a conventional mortgage last month. Not only would his costs rise $7,000 a year if he kept the mortgage, he would have to pay a $10,000 prepayment penalty just to get out of the deal.

Soodul, a former mayoral and council candidate in Allentown, is among the legions of consumers finding out the hard way these days about the cooling housing market.

Easy credit deals have evaporated and the complex underpinnings of some loans, like the negative amortization mortgage Soodul took out, are becoming all too clear to an increasing number of homeowners.

Soodul is battling back by filing a complaint with the state banking department in which he contends he was misled by the mortgage company about the costs of the loan.

Others are in more dire straits. In county offices throughout the state, foreclosure filings are rising sharply, meaning lenders are seeking to take control of properties after borrowers miss payments. Those homes can then be sold at sheriff’s sales or through real estate agents.

“We’ve seen a 30 percent increase in our foreclosures in the last five or six months,” said Mercer County Clerk Paula Solami-Covello. “Some lending institutions made it easier for people to get mortgages, and maybe they don’t make the salary to pay for them. People are getting into situations where they just can’t pay.”

All towns in the county, even wealthier areas where homes carry price tags of $500,000, have seen increases in foreclosure filings, which are the first step toward a sheriff’s sale, Solami-Covello said. In 1998 and 1999, there were about 1,000 new foreclosure filings in Mercer County for the entire year. This year, 421 were filed through the end of March.

Statewide, the figures are even more dramatic.

There was a 70 percent increase in new foreclosure filings statewide from the third quarter of 2005 to the third quarter of 2006, said Jeff Posner, owner of SheriffSalesOnline.com, a Web site that tracks the filings. In January, the state filings more than doubled over the same month last year; in March, filings were up 22 percent.

Last year, more than 1.2 million foreclosure filings were recorded nationally by the Web site RealtyTrac, up 42 percent from 2005.

TOO MUCH ‘CHEAP MONEY’

While the housing market always has its share of distressed borrowers, experts believe boom-time credit practices are accelerating the pace this time around.”A lot of cheap money out there was fueling the real estate market,” said Timothy Duggan, who chairs the bankruptcy and creditor’s rights group for the law firm Stark & Stark.

“Wages haven’t kept up with the increase in the housing costs,” Duggan said. “There is a higher default rate because people are struggling to service their debt.

“People, over time, have taken on too much debt,” he added.

“Lower interest rates and the ability to obtain from the subprime market by less qualified borrowers are factors. Others have just continued to borrow.”

Indeed, as housing prices soared during the boom years, lenders eased terms to get money in consumers’ hands. In the first half of 2006, only 62 percent of mortgages in dollar value were prime loans, meaning they were issued to borrowers who qualified according to conventional lending standards, said E. Robert Levy of the Mortgage Bankers Association.

About 19 percent of mortgages in dollar value nationwide were non-prime loans, with one in four of those going to first-time buyers, Levy said. The rest were somewhere in between.

Mortgages with prepayment penalties are “fairly common with certain types of loan products,” Levy said. Under state law, banks and mortgage companies chartered in New Jersey are not permitted to levy such charges, but companies based in other states can require them on loans written here, he said.

There was “an easing of underwriting standards, where we provided loans for people with poor credit, who maybe in the past wouldn’t have gotten loans, people who wouldn’t have been able to purchase homes in the past,” Levy said.

Levy believes regulators will soon impose stricter rules.

“There’s no question credit will tighten now,” Levy said.

Frank Mancino, of Gateway Funding in Hamilton, said mortgage companies are already tightening their lending practices. While it was possible two months ago to get a mortgage without proof of income or a good credit score, that is no longer viable, Mancino said.

“The money was flowing very freely and everybody wanted to get in on that lending,” Mancino said.

Posner blamed lenders for the foreclosure surge.

“It’s the loose lending,” Posner said. “Not just subprime loans, there are also a lot of prime loans in foreclosure.”

People have been offered 100 percent financing, he added.

“Three or four years ago, you could never get a loan like that,” Posner said. “Even people with good credit want to put down less money if they can get away with it.”

OTHER FORECLOSURE FACTORS

While certain lending practices are blamed for the mounting foreclosures, there are many other reasons homeowners falter.Job loss, divorce and other economic factors — including rising taxes — may play a role, experts say.

For example, Trenton resident Denice Hunt, who lost her job at the Communication Workers of America union in 2004, is more typical of what can happen when circumstances conspire to reduce a person’s income.

The 56-year-old Trenton woman, who said she receives disability payments because she suffers from emphysema, diabetes and heart failure, may lose her home, too.

Hunt has been unable to keep up with the $780-a-month payments on the $80,000 mortgage she has on the two-story, red brick house on Bellevue Avenue.

She was notified in February that the mortgage company planned to foreclose, but she hopes to forestall that fate with the help of lawyers from the Legal Aid Society of Mercer County.

“I want to believe it’ll be all right,” Hunt said. “It’s been really, really scary and hard. This is my home. When I was a little kid, I used to walk through this neighborhood and think it was beautiful. This is my home, and I don’t want them to take it. I have to believe it’ll be all right, or I’ll drop dead.

“I’ve been sick for a long time,” Hunt said tearfully. “Last June I got into some problems and wasn’t able to make my house payments. I got some money together but not in time.” Her older son, who is 32, has helped her out financially. Her younger son, 25, lives with her but is “neurologically impaired” and also on disability, she said.

“My house is the only thing I got left now,” Hunt said.

RISING PROPERTY TAXES

Mercer County Executive Brian Hughes adds taxes to the list of costs that are stretching homeowners to the breaking point.”With the rising property taxes in Mercer County and throughout New Jersey, it is almost forcing some people into foreclosure,” Hughes said. “It is a very difficult situation where someone is on Social Security or a fixed income, with a very modest increase. It’s easy to see why some people are getting into that situation.”

The county offers a program for first-time home buyers and all clients are warned about the risk of foreclosure, he said.

“We do make sure you have the ability to understand what foreclosures are and what they mean to your debt history,” Hughes said. “It’s not something that goes away. It can follow you the rest of your life.”

The first-time home-buyer program offers help with housing costs and residential rehabilitation.

“That’s where people get into trouble, they borrow the maximum amount and then can’t afford basic weatherization,” Hughes said. The county housing office also can help with heating bills in the winter and air conditioning in the summer.

Not all foreclosure notices end with people losing their homes.

In New Jersey, the process can take from seven to nine months from the first court filing, called a lis pendens, to a sheriff’s sale. Typically, only about 30 percent of the properties on foreclosure lists go on to a sheriff’s sale, said Posner.

The Mercer County Sheriff’s Office has seen a slight increase in actual sheriff’s sales from 2006 to 2007, said Cathy Garton, assistant to the sheriff. In January 2006, 19 properties were sold at sheriff’s sale, compared with 24 properties in 2007. In February 2006, 16 were sold, and in February 2007, the sheriff sold 23. And in March 2006, 24 properties were sold at sheriff sale with 26 sold last month.

HOUSING VALUES TUMBLE

Borrowers who get into trouble can’t rely on selling their homes to pay off their debt.Real estate values have dropped, and houses are remaining on the market longer.

From 2000 to 2005 housing prices in New Jersey rose 85 percent, said Pat O’Keefe, the CEO of the New Jersey Homebuilder’s Association. But beginning in 2006, the “housing market stalled,” he said. “Particularly in the resale sector. It ground to a halt.” Sales are down 20 percent since 2005, he said. This spring, prospective sellers are becoming more realistic and lowering their prices, he said. But sales are still “very sluggish” except for houses at or below $300,000, he said.

In Mercer County, 4,450 homes sold at an average price of $341,017. That’s down from 5,410 sold in 2005, according to Greg Williams of TREND Multiple Listing Service. In Burlington County, 6,402 houses were sold last year at an average price of $284,693, down from 7,580 the previous year. While real estate agents try to work with those hard-pressed homeowners to sell their houses, it’s often very difficult to make a sale in time to save their equity, said Peter Doolan of Doolan Realty.

“In Ewing we had a property for sale for several months,” Doolan said. “We finally got a deal on it and the mortgage company foreclosed. Usually, the homeowners call you when it’s too late and the rug is about to be pulled out from under them. It’s usually a losing proposition all around. It takes months to sell a house these days.

“You’re trying to satisfy the homeowners’ concerns,” Doolan said. “They’re up against the wall. Sometimes it works, and sometimes it doesn’t. We’ll be working with a homeowner and they’re in financial difficulty and they don’t let on to us.”

But if they have both a first and a second mortgage “they can owe more on it than they can sell it for,” he said.

Staff Writer Jeff Trently contributed to this report. Linda Stein can be reached at lstein@njtimes.com or (609) 989-6437.

© 2007 The Times of Trenton

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