Mortgage woes could be 'tip of the iceberg'

John W. Schoen Senior producer • Profile • E-mail

Mark and Kerrie Russo, a Jackson, N.J., couple raising two young daughters, are struggling to hang on. Less than a year after buying a home in 2005, which they financed with a 30-year fixed rate loan based on a solid credit history, a local mortgage broker began sending letters offering to refinance their loan. A new product, the sales pitch said, allowed home owners flexibility to choose from a menu of different payments from one month to the next.

What the broker didn’t explain, Kerrie Russo says, is that this was a “negative amortization” loan — an expanding debt that buried the couple deeper in hock even as they thought they were paying down their mortgage balance.

Like many borrowers who were sold mortgages they couldn’t afford, Russo says that when she called the broker to complain, she was told that because she failed to read the fine print, the responsibility for getting in too deep was hers.

After coming up with about $14,000 to get out of the downward spiral into yet another loan, Russo says she’s learned an important lesson.

“I have learned a new term called 'predatory lending,'” she said. “And that is what I am a victim of.”

As hundreds of billions of dollars worth of these loans “reset” to higher monthly payments, many so-called “subprime” borrowers — historically those with shaky credit histories — are sitting on financial time bombs. They’re finding out the hard way that the paperwork they signed may have buried them under a crushing debt load they can’t sustain.

Swindlers and predators
For some, the lesson learned is: “buyer beware.” But a series of interviews with subprime borrowers, mortgage lenders, appraisers, current and former regulators, and the inspector general of the Department of Housing and Urban Development paints a different picture — of a widespread pattern of questionable lending practices and outright fraud that has already sparked a wave of criminal and civil actions against various players in the $10 trillion market for residential mortgages.

Questionable mortgage practices can take on many forms, but the fall into two broad categories:

• Predatory lending. In this case, complex mortgage terms and interest rate risks were not fully explained as required by federal law. The borrower is usually the victim.
• Mortgage fraud. In these cases, often carried out by sophisticated swindlers, the lender is typically the victim.

As the housing market boomed in the early part of this decade, lenders proliferated with deals that often seemed too good to be true. To be sure, some borrowers - eager to "cash out" their rising home equity generated by the housing boom - were too quick to refinance at below-market interest rates and artificially low monthly payments.

Many of those now facing default and foreclosure failed to do enough homework, relied too heavily on verbal assurances and didn't read the documents they signed closely enough. And not everyone took the bait.

Ron Melancon of Richmond, Va., was among those who stopped short of the brink. When Melancon and his wife went shopping for a bigger house for their growing family a few years ago, he figured he’d have a hard time getting a mortgage. After a rough patch that left him in over his head with credit card debt, he still had a bankruptcy filing on his credit record.

But when he stopped in at a model home in a new subdivision, he was surprised to learn that not only was the builder willing to give him a mortgage, but he was told he could qualify for a loan big enough to buy a $400,000 model, which was bigger and better-appointed than the $320,000 house he and his wife felt their budget would handle. Melancon decided to keep shopping for a less expensive house.

“I just knew from being freshly out of bankruptcy and the experience of going to court and getting your whole life twisted upside down — I just didn’t want to go through it again,” he said. “But it was so hard to back away.”

When he took a closer look at the terms of the adjustable mortgage he’d been offered, he knew he’d made the right decision.

“They never told you the whole truth,” he said. “They said the rate could not adjust more than two points in any one year. But they never told you that the first year out of lock it can go as high as 9.99 percent — it was buried in the paperwork.”

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