Foreclosure gridlock threatens economy

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

Like a lot of Americans, Anne Violette is having trouble with her mortgage.

Violette, a self-employed photographer, moved to Delray Beach, Fla., in 2004 and bought a home with a 30-year fixed-rate loan. A year later, she said, a friend in the mortgage industry sold her on the idea of refinancing with an adjustable-rate mortgage that saved her hundreds of dollars a month.

Now she is unable to keep up with her rising house payments but has found it virtually impossible to work with the lender on a new payment plan. Her story illustrates the plight faced by millions of Americans who have seen payments soar on their adjustable-rate mortgages or will face such "resets" in the next few years.

State and federal lawmakers including Bush administration officials and presidential candidates are racing to come up with ways to head off a wave of potential foreclosures that could be the result.

Violette said her problems began when she learned that the rate on her loan could nearly double, despite assurances that it would not rise more than a half-percent a year for the first three years. Eventually her monthly payments rose by $900, and she was unable to keep up. She began making calls to the lender, moving from one department to another, to see if she could work out a payment plan.

“They say, 'I’m sorry, but we can’t restructure your loan until you’re caught up,'” she said. “But I keep saying, ‘I can never be caught up until you restructure my loan.'”

After more phone calls, Violette found a bank representative who agreed to help modify her mortgage. That was in August. The bank had her house appraised, but then she got a letter from another bank saying they had taken over her loan. In October, she called the first bank to find out where things stood and learned that the title company she used when she bought the house is out of business and that her loan is "in limbo," she said. (A spokeswoman for the lender said the company's policy forbids disclosing customers' financial information.)

“We very much want to avoid these kinds of wide-scale foreclosures,” said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., which is working to encourage lenders to modify loans. “Not only is it going to hurt borrowers and hurt neighborhoods and hurt communities, it’s going to spill over more broadly into the housing market generally and have more systemic implications.”

The systemic implications already are being felt. Uncertainty about the extent of future losses  has hammered the stock market and tightened credit for businesses as the economy shows signs of slowing. In many areas foreclosures are adding inventory to an already-glutted housing market. As consumers watch home prices slump and their equity melt away, some economists fear the housing recession could spill over to the broader economy.

“The housing recession, which is continuing and probably will get worse, has not spread to consumption yet," said Sung Won Sohn, an economist and president of Hanmi Bank. "But I think it's only a matter of time.”

Homeowners facing higher rates on their adjustable mortgages have reason to be concerned.  Over the next four years, some $1.5 trillion in mortgages are scheduled to reset, according to an analysis by Credit Suisse.

The most problematic loans came with 'starter' rates, usually fixed for the first two or three years, that were written in the tail end of the lending boom. Unlike conventional adjustable mortgages — with payments that can fall if market rates go lower — monthly payments on these loans are destined to jump to substantially higher levels regardless of market rates. Unless lenders agree to modify the terms, many of these borrowers will likely default.

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