Military homeowners feeling the pinch

http://www.navytimes.com/news/2008/01/military_foreclose_080126w/news/2008/01/military_foreclose_080126w

Military homeowners feeling the pinch


By Karen Jowers - Staff writer
Posted : Tuesday Jan 29, 2008 16:23:54 EST
Even if they don’t have risky or costly home loans themselves, many military homeowners are feeling the pinch of the nation’s recent housing crisis — or soon will be.
Housing values and prices are plummeting in many regions of the country (bad for sellers), and lenders are tightening credit standards (bad for many buyers).

As a result, military families with permanent change-of-station orders are squeezed on both fronts.

And for those who got caught up in the hyped-up housing boom and overextended themselves with risky mortgages or cashed in on now-vanished home equity, the market is even scarier.

Three factors are driving the crisis, with the first two essentially creating the third:

* The proliferation in recent years of high-interest “subprime” mortgages. The bulk of these are adjustable-rate mortgages that begin with low “teaser” interest rates, and many borrowers cannot make the higher monthly payments when these loans reset, usually in the third year.

* Adjustable-rate mortgages, which have become popular with homebuyers who do not necessarily have credit problems. These types of loans have a set rate for a certain initial period, after which they can fluctuate up or down. With interest rates rising in recent months, most ARMs have headed upward, in some cases beyond the means of borrowers.

* Problems with foreclosures and defaults on subprime loans and ARMs are depressing housing values and feeding the housing glut — a serious issue for service members who recently bought homes at or near the market’s peak. Many troops receiving reassignment orders these days find that they either can’t sell their homes or can sell only at greatly reduced prices that result in big financial losses.

Subprime mortgages have been the tinder fueling the fire. The Center for Responsible Lending says an estimated 2.2 million families who got subprime loans from 1998 through 2006 either have lost their homes to foreclosure or will in the next few years. And since foreclosures cause property values to drop, nearly 45 million homes not facing foreclosure will decline in value by an estimated $233 billion in the next two years.

Subprime mortgages are higher-cost loans aimed at people with blemished credit histories. On the positive side, they made home ownership possible for some people who couldn’t previously afford it, said Sharon Reuss, spokeswoman for the Center for Responsible Lending. But in the process, lenders made loans without carefully considering a borrower’s ability to repay.

In recent years, the subprime market has been flooded with “exploding” loans that come with initial low “teaser” interest rates but later reset to much higher rates — typically 30 percent to 50 percent higher in the third year. They may continue to adjust every six months.

Reuss said borrowers often were steered to higher-cost adjustable-rate loans even when they could have qualified for a lower interest rate on a regular, fixed-rate loan.

No statistics are available on how many military homeowners have adjustable-rate loans and are having problems.

“It depends on where you are. If you’re in a state experiencing a high foreclosure rate, and you’re in a subprime loan, you could be in trouble,” Reuss said.

But some of the states hit hardest by home foreclosures and mortgage delinquencies, such as Georgia, California, Florida and Ohio, have large military populations. And it’s not just subprime loans that are getting people in trouble.

In Ohio, the Springer family’s home is in foreclosure, like 5.5 percent of all mortgage loans in the state.

In early 2007, Air Force National Guard Tech. Sgt. Timothy Springer and his wife, Teresa, took out a second mortgage for $30,000 at 10.5 percent interest because they had money problems for a variety of reasons related to Timothy deploying, Teresa losing her job because of medical problems and child care issues, along with costly home repairs. Timothy is home now, but will probably deploy again in May.

The lender valued the Springers’ house over the phone at $132,000, without an appraisal, before giving them the $30,000 second mortgage, Teresa Springer said.

A rate of 10.5 percent is on the high side for a home-equity loan; Navy Federal Credit Union, for example, offers equity loans with fixed rates as low as 6.15 percent. But home equity rates are based largely on an applicant’s credit history; those with shaky finances pay more.

Teresa Springer acknowledged that the interest rate was high. “All we did was delay the inevitable,” she said, by putting off a problem that they knew was looming large for them.

The combination of their primary mortgage and new second mortgage propelled the Springers’ monthly payments from $775 to $1,400.

A few months later, when the Springers had no choice but to put their house on the market, real estate agents told them the house was worth just $59,000 — half of what they owe.

So in addition to the house being in foreclosure, Teresa Springer said, “We’re not going to have any option other than bankruptcy.” That’s on top of a previous bankruptcy as a result of medical bills.

Problems related to such “piggyback” second mortgages are also common problems among homeowners in financial distress, Reuss said.

When people such as the Springers can’t make mortgage payments, they put their homes on the market in desperate straits. In a glutted housing market, prices drop. And when foreclosures rise, property values plummet.

Ripple effects
A sailor in San Diego who bought a home for $417,000 two years ago using a loan backed by the Veterans Affairs Department now finds that his home is worth $317,000, said Keith Kaufman, personal financial management program manager for the Fleet and Family Support Center for the Navy’s Southwest Region.

That means the sailor is upside down on his loan — he owes more than the house is worth.

“There is no program that protects him from the housing market going down,” Kaufman said. “We’re seeing the first huge readjustment of home values in 50 years here. Even people who did buy with appropriate mortgages are affected.”

Those who can ride out the storm and avoid selling their homes until the market turns around may do OK, he said.

But military members often have no choice about whether and when to move, Kaufman said.

If they’re just squeaking by where they are, and then move to another area with a lower housing allowance rate at the same time their mortgage interest rate is resetting to a higher rate, they will be unable to make their payments while also maintaining a residence at the new duty station, Kaufman said.

Foreclosures negatively affect a person’s credit rating — which can affect service members’ security clearance and harm their careers, he noted.

A consumer credit counselor in Manhattan, Kan., near Fort Riley, is seeing more military personnel asking for help to save their homes because they have homes in other states in areas where the value of homes has dropped dramatically.

“The scary ones have been those in [adjustable-rate] loans who got in thinking they would live in the home a few years, the home would appreciate in value, then they would be relocated and sell the home at a profit before the interest rates ever reset,” said Joscelyn Stephenson, a certified consumer credit counselor for the nonprofit Housing and Credit Counseling Inc.

“Now they can’t get the home sold, and not only could they not afford the house payment after relocating, but now the interest rate has or is scheduled to reset, causing the payments to go up $300 to $500,” she said.

Even people who play it safe are getting caught in the housing-market turbulence. Case in point: the Battles, whose home in Bremerton, Wash., has been on the market since June 4.

The Navy family had a traditional fixed-rate loan, but the sour market has prevented them from selling their home for an adequate price. In early January, after their home had been on the market for seven months, the Battles turned down an offer about $15,000 less than their asking price. They would have had to come up with the difference to pay off their loan.

Their experience has soured them on buying another house, at least until retirement.

“This has scared us,” said Michelle Battle, who has been living with family members in Missouri with their two children after her husband, a Navy chief petty officer, moved to a new duty station at Naval Station Great Lakes, Ill.

They can’t afford to rent or buy a home in Illinois as long as their Washington home is on the market.

The market downturn did not happen gradually, she said. “It happened overnight. This is our first shore duty in eight years, and we’re still not together.”

Mortgage pain can spur gains
The Bush administration is helping some people refinance adjustable-rate loans through a new government-backed mortgage loan, FHASecure. The option will save the average subprime homeowner about $400 a month, or $30,000 over the life of a loan, said Steve O’Halloran, a Department of Housing and Urban Development spokesman.

To qualify for the refinancing program, and include delinquent payments, homeowners must:

* Have an adjustable-rate mortgage that has reset and is not insured by the Federal Housing Administration.

* Have sufficient income to make the mortgage payment.

* Have a history of on-time payments before the loan reset.

The administration has also reached an agreement with major mortgage lenders to freeze interest rates for five years. It applies to homeowners who got adjustable-rate subprime loans between Jan. 1, 2005, and July 31, 2007, and who face a sharp jump in interest rates before July 31, 2010.

Meanwhile, for military members just moving to bases in Georgia — and other areas where the home market is slumping — there is some good news.

“It’s a buyer’s market ... builders are cutting prices, sellers are cutting prices,” said Tracey Burdette, chapter president for the Mortgage Bankers Association of Savannah, Ga., an area that includes Hinesville and Fort Stewart.

It’s much the same in the Bremerton area, where housing prices have dropped by about 20 percent, said Joana Hoover, a real estate agent with RE/MAX Town and Country in Port Orchard, Wash.

“The inventory is extremely high,” she said, and prices are returning to earth after years of soaring increases.

“It had gotten to the point where military couldn’t afford to buy.”

Avoiding foreclosure
The Department of Housing and Urban Development has a wealth of information for homeowners facing foreclosure because they can’t keep up with their mortgage payments. Visit http://www.hud.gov/foreclosure/. Seven basic tips:


1. Don’t ignore the problem.

2. Contact your lender as soon as you realize that you have a problem.

3. Open and respond to all mail from your lender.

4. Know your mortgage rights.

5. Understand foreclosure prevention options.

6. Contact a HUD-approved housing counselor by calling (800) 569-4287.

7. Prioritize your spending.

Source: Department of Housing and Urban Development


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