As 'subprime' rates shoot up, owners despair

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[/FONT],0,2747639.story?coll=orl-home-headlines As ‘subprime’ rates shoot up, owners despair

Richard Burnett
Sentinel Staff Writer

April 29, 2007

Twanda Thompson doesn’t want to lose her home. But unless she can solve her mortgage woes, she and her four children may have to start looking for an apartment.

Like many would-be homeowners with below-average or poor credit, the Orlando woman took out a “subprime” mortgage during the housing boom to buy a place she really couldn’t afford.

Now her adjustable-rate mortgage is three months away from a boost in interest that will increase her monthly payment 30 percent. More increases lie ahead – and she already is delinquent on her loan.

“I’ve been on an emotional roller coaster,” said Thompson, a 34-year-old insurance agent. “It’s just very stressful. I’ve worked so hard to get this far, to have a home and raise my children. To lose ground now is not acceptable to me.”

As the nation’s housing markets continue to slump, the subprime-mortgage business is suffering a meltdown.

Many lenders flung open their doors to subprime borrowers during the five-year housing boom, looking to capture more of the market for such mortgages, which come with higher-than-normal interest rates.

Lured by artificially low “teaser” rates, people flocked to these lenders, hoping to fulfill the American dream of owning a home. But as the temporary discounts expire, reality is setting in, and mortgage delinquencies and foreclosures are spiking among the country’s subprime borrowers.

As of February, more than one in every seven mortgages in the U.S. was a subprime mortgage. And more than 4 percent of those subprime loans were in foreclosure that month – more than four times the foreclosure rate of conventional mortgages.

This is, of course, traumatic for the borrowers, many of whom are low- to moderate-income minorities living paycheck to paycheck. Studies indicate that black and Hispanic borrowers are two to four times more likely than non-Hispanic whites to wind up with a subprime mortgage.

Defaults could hurt prices

But if the problem continues to escalate, the ill effects could spread. Subprime defaults could spill huge numbers of “bargain” homes onto the resale market, dragging down neighborhood home prices and stifling residential construction.

More than 1.15 million subprime borrowers across the country are already in serious trouble with their loans, according to the latest estimates from First American LoanPeformance, a San Francisco mortgage-data business.

The foreclosure rate for subprimes nationwide nearly doubled between February 2006 and February 2007, First American calculates, while the severe-delinquency rate (the percentage of loans with payments at least 60 days late) jumped more than 60 percent in the same 12-month period.

In Florida, nearly 93,000 subprime-loan homeowners were in the lurch as of February, according to First American. And during the previous year, the state’s subprime-foreclosure rate tripled, while its delinquency rate shot up 72 percent.

Florida is more exposed to the problem than the U.S. as a whole: Nearly 20 percent of all mortgages in the state were subprime as of the end of January versus 15.3 percent nationwide. But so far, Florida’s subprime-delinquency rate (10.2 percent) is lower than the national average (12.2 percent).

Central Florida’s subprime problems have generally been less acute than even the state’s, though the region has not been immune. Brevard and Volusia counties, for example, have some of the highest foreclosure and delinquency rates among Florida metropolitan areas.

Warning signs locally

Even Metro Orlando’s subprime foreclosure and delinquency rates, still among the lowest in Florida, have spiked in the past year. The foreclosure rate in the metro area (Orange, Seminole, Osceola and Lake counties) almost tripled to 2.8 percent, while the delinquency rate more than doubled to 8.5 percent.

Local experts say turnover in homes financed with subprime loans may already be contributing to the region’s housing slowdown. The inventory of homes for sale through the Orlando Regional Realtor Association, for example, has nearly doubled since January 2006, while the year-over-year change in median price for homes sold through the Realtors has dwindled from a 24 percent increase in January 2006 to zero as of this March.

“You have to look at the two different sides of the coin,” said William Weaver, a real-estate professor at the University of Central Florida. "The problem is a lot worse now than in the past, and it is likely to get even worse.

“But we are still better off than many places in the country,” he added. “We still have historically high employment rates and a robust economy that are surely going to help us get through this over the next couple of years.”

The subprime-foreclosure rate could approach 20 percent, even in Central Florida, according to a study by the Center for Responsible Lending, a research and advocacy group in Durham, N.C.

In part that’s because so many subprime lenders have collapsed this year, making it harder for financially strapped subprime borrowers to find someone willing to refinance burdensome loans with adjustable rates.

“That part of the market has come to a screeching halt,” Weaver said. “And when these mortgages adjust, they are going to adjust with a vengeance. That’s going to put a lot of families in very perilous financial circumstances.”

Many minorities are especially at risk, housing advocates say, because historically they have been saddled with a disproportionate share of the country’s higher-cost, subprime mortgages.

For example, a recent study by Fair Finance Watch, a New York advocacy group, concluded that black borrowers in the New York metropolitan area were 4.4 times more likely to wind up with subprime rates than comparable white borrowers. The same study found that Hispanics were nearly 2.4 times more likely than non-Hispanic whites to pay subprime rates.

There’s a glimmer of hope for those in trouble, in that the problems roiling the subprime market have drawn the attention of banking regulators, members of Congress and mortgage-industry leaders.

Earlier this month, mortgage-finance giants Freddie Mac and Fannie Mae said they were developing new programs to help stem the tide of subprime-loan defaults. Freddie Mac said it also would buy as much as $20 billion worth of subprime mortgages to help support refinancing for subprime borrowers.

It’s not clear whether such programs will arrive in time to help homeowners such as Twanda Thompson, the Orlando insurance agent behind on her subprime mortgage.

“Right now, I just need an affordable mortgage, and I’m looking for some kind of solution,” she said. “I’ve been through a lot of turbulence, but I know I need to keep going forward, to set an example for my kids.”

Solutions exist

There are options for people in Thompson’s situation, according to Cora Fulmore, a mortgage counselor in Winter Garden and director of Metro Orlando’s “Don’t Borrow Trouble” financial-literacy program.

Loan modifications and refinancings are out there, though it takes extra effort to find them these days, said Fulmore, who is helping Thompson.

“We’re trying to get her out of this nightmare, and believe me, it is a nightmare,” Fulmore said.

Homeowners facing similar problems may contact the “Don’t Borrow Trouble” program at 407-654-3378 or NeighborWorks America, a Washington-based nonprofit housing-advocacy group, at They can also contact the Homeowners Preservation Foundation at 1-888-995-4673.

“We need to let people know there are some options before they step out and do something that makes things worse,” Fulmore said.

*Richard Burnett can be reached at or 407-420-5256.

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