Scenes from a Meltdown

Business

The mortgage market underwent a meltdown in 2007. What do experts——including those whose payments inflated greatly——say about it?

I'M SURPRISED my husband and I are still together,” says Jennifer, a 32-year-old administrative assistant. “We were first-time buyers,” she says, recalling her experience with the mortgage meltdown of 2007.

She and her husband thought they’d have five years of fixed payments as they settled into their house in Santee with a young son. But after two years in the house, they received The Letter.

“It said the mortgage was going adjustable, and we weren’t prepared because we thought we had five years at the fixed rate,” Jennifer says. The letter indicated her mortgage payment was going to double, to about $3,000 a month. “We thought, ‘Oh my gosh, we need to refinance.’ ” But when Jennifer and her husband investigated that option, they met The Problem.

“There was a prepayment penalty,” Jennifer says, “which was about $14,000 we didn’t have. So we called the mortgage holder and said ‘We’re trying to save the house so we don’t foreclose.’ ” She halts at the recollection of this and sighs. “What would you do?” she asks.

Jennifer and her husband tried to work it out with the lenders but found them unsympathetic. “I felt we weren’t being understood; that we were being treated like trash,” she says. They had never missed a payment before the mortgage went adjustable, she adds.

But eventually, they did miss payments, and Jennifer says sleeplessness and stress became uninvited guests in her home. “There’s the embarrassment of it all, losing the house,” she says. “I feel like we were taken advantage of as first-time buyers, but we have to take responsibility for not knowing what was in the contract.”

AFTER TWO YEARS in their Spring Valley home, Laura and her husband received a letter informing them their mortgage payment was going to increase by almost a grand, from about $3,600 a month to $4,500. “We have three kids, and I couldn’t possibly make that payment,” says Laura, who operates a restaurant with her husband.

She went to a bank seeking refinancing, and the bank sent her to the Neighborhood House Association, a community services organization that offers mortgage counseling.

“They helped me negotiate with the mortgage company to keep the increase to $300 a month instead of a thousand,” Laura says. She and her husband didn’t lose their home, but she still feels she was misled about when the adjustable rate was supposed to kick in.

“I got mad that they didn’t explain to me that it was going to happen after two years,” she says.

Rudy Johnson, CEO of the Neighborhood House Association, says some of his clients are victims of predatory lenders. “People have a bunch of reasons for getting behind,” Johnson says. “These predatory lending concepts have gotten folks into trouble with graduating interest loans and balloon payments that are past what their income level can handle.”

Borrowers may have the ability to pay their mortgages at the introductory rate, Johnson says. But they cannot keep up once the payment increases or the family is hit with a job loss. “They get themselves in trouble and don’t know how to dig out,” he says.

Lenders filed a record 72,571 Notices of Default (NoD) on California homebuyers in the July-to-September period last year, an increase of 35 percent from the previous quarter and more than 150 percent from a year ago, according to DataQuick Information Systems of La Jolla. In San Diego County, 5,673 NoDs were filed in the quarter, up 140 percent from the previous year.

Gary Symington, president of the counseling service DebtFreeAmerica.com, says it’s a slippery ride down Foreclosure Street, and many of us are already living in Edge City. “Start with the fact that as a country we have a negative savings rate,” he says. “You pull out equity, hit a reversal or have a major medical condition, and you’re there. The foreclosure numbers are only numbers——until you see how it hits somebody.”

As late as June, so-called experts were saying the “subprime mess”——loans made to borrowers with suspect or “subprime” credit——would be confined to its own lonely corner of financial hell. Not even close. Once the Wall Street investors discovered the bundled subprime loans they bought on the secondary market were tanking, they screamed bloody murder. Mad Money’s Jim Cramer wrote in New York magazine that the situation was so dire, Goldman Sachs workers might not receive bonuses this holiday.

The Federal Reserve responded with rate cuts to pump more cash into the market. In October, the subprime mess reached into the boardrooms of Citigroup and JPMorgan Chase as the nation’s megabanks created a $100 billion fund to keep the mortgage crisis from damaging the broader economy.

IN SAN DIEGO, the subprime crisis spilled over into the rest of the housing market, making it harder for buyers to obtain “jumbo mortgages” of more than $417,000. Because of the high cost of housing here, many borrowers need a jumbo to enter the game.

The SoCal market responded with its worst September performance since 1988, with 12,455 homes sold, about half of an average September. San Diego sales dropped 35 percent to just 2,152, and the median price of a home here fell 3.1 percent to about $470,000, DataQuick says.

“September dropped dramatically, and that was due to the meltdown in the mortgage market,” says David Cabot, president of the San Diego Association of Realtors.

The subprime mess even claimed a local business casualty, San Diego’s Accredited Home Lenders. Once a darling of the subprime market, with more than 12,000 independent brokers in the United States and Canada, Accredited was purchased in October by Texas private equity group Lone Star for chump change, roughly $300 million (a deal Accredited had to sue Lone Star to make good on, as the market declined and the suitor lost interest). Accredited did not respond to requests for an interview.

ACCREDITED, HOWEVER, is hardly the only lender with subprime trouble. In fact, the major players in the subprime mess——including L.A.’s Countrywide and Wells Fargo——have launched a Web site, hopenow.com, that says it provides “support and guidance for homeowners.”

Some experts believe the federal government should share the blame. “They dictate the lending rules for the banks, plus the biggest buyers of mortgage loans are [government-backed agencies] like the Freddie Macs and Fannie Maes,” says Alan Nevin, director of research for MarketPointe Realty Advisors. “The federal government turned its head and really didn’t do anything to ensure these silly loans wouldn’t be made.”

Nevin, who assesses the market for developers, says because the refi boom extended through 2005, millions of mortgages will be resetting in the next two years with the same kind of fallout the market is seeing now.

Meanwhile, the Fed’s rate-cutting is sure to set off a new round of refinancing. An e-mail campaign from Countrywide promises borrowers “low monthly payments” and a “low fixed rate”——but doesn’t specify for how long.

“Countrywide Help [sic] Make Dreams Come True,” says the e-mail.

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