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Episode #2316
Homebuying and the Housing Crisis
Brown: Since 1998, home foreclosures in North Carolina have risen by almost 174%. In 2007, nearly 49 to 50,000 North Carolina homes were in some stage of foreclosure. Nationally, home foreclosures are at a crisis level. What’s being done to stem the tide of so many foreclosures? And what can consumers do to prevent foreclosure, or protect themselves if they are already in the process of foreclosure? We’ll answer these questions and share timely advice, next on Black Issues Forum.
VO: Quality public television is made possible through the financial contributions of viewers like you who invite you to join them in supporting UNC-TV.
Brown: Good afternoon, everyone, and welcome to Black Issues Forum. I’m Natalie Bullock Brown. North Carolina is ranked 18th in the nation when it comes to the number of homes in foreclosure throughout the state. Many homeowners are falling prey to the foreclosure crisis, in part because they are not aware of their rights as consumers and homeowners. Most experts agree that this is just the beginning of what may become an even worse problem. So we’re very grateful to have with us today two experts who are working hard to help consumers know their rights and avoid losing their homes. I’d like to introduce Stella Adams, former director of the North Carolina Fair Housing Center and currently a consultant and policy advocate for fair housing and fair lending practices. We also have with us Elsie Gilmore, a certified housing counselor and the director who works with Kingdom Community Development Corporation, which handles housing cases in southeastern North Carolina. Welcome, both of you, to Black Issues Forum.
Adams: Thank you.
Gilmore: Thank you.
Brown: And I want to start off with just, I guess, a background on the crisis. And I’m going to start with you, Ms. Adams. Why do we find ourselves in a place of national crisis as far as home foreclosures are concerned?
Adams: Well, during the—from the period of like 19—I mean, 2002 to 2006, we saw underwriting criteria just drastically fall. There was a change in the way that the mortgage market worked. And so no one had responsibility for the—it was like a game of musical chairs. And so the person who originated the loan, once they had their money out of the origination, they had no further responsibility. And so then they sold it to a lender, who then sold it to an investor on Wall Street, who then packaged it and sold it in another capacity. So no one was ultimately responsible, except for the homeowner, for the loans.
And so you started seeing lax underwriting standards instead of requiring significant down payments. You had 100% loans. Instead of folks having mortgage insurance, they were encouraged to take out piggyback loans, where they had a first loan and then a second loan on top of that. So they were—they didn’t put any money into the process. Then you had situations where people were put in adjustable rate mortgages, but they didn’t understand that they were in those mortgages. And that’s where this first tic [ph] of the crisis is coming in. As these loans are adjusting, people are just finding out that they weren’t in a fixed rate loan, that they were in fact in an adjustable rate loan. And they’re seeing their payments increase some 58 to 90%, overnight. And, you know, we didn’t get raises like that.
Brown: Right.
Adams: [LAUGHS] So, folks who could afford that $400 payment can’t afford that $800 payment, and that’s why we’re seeing this crisis right now.
Brown: Well, Ms. Gilmore, is it not true that, in some instances, the people who are getting loans, these types of loans that Ms. Adams just described, aren’t really able to afford those initial loans? We talk about the subprime lending practices and the prime loans that, I guess, are really reputable and more the standard in the mortgage industry.
Gilmore: Right. The reason most of the people are getting the subprime loans are because they had credit issues and could not get the loan that they would prefer to get or could possibly get if they had better credit; they could get it from the bank. But because of the issues that they had and not having any type of education beforehand, they would go to the subprime lenders and then end up getting the ARM loans, or the adjustable rate mortgages that Ms. Adams was talking about. And, of course, what they would do with the adjustable rate mortgages, in two, maybe three years, because a lot of them would adjust in two years and some would adjust in three, they should have been, you know, trying to correct their credit issues, payoff some debt. But, instead, they were getting deeper into debt, and then there was no way for them to refinance to get a fixed rate loan at that time. So then this would, you know, cause them to go into foreclosure most of the time.
Brown: And Ms. Adams?
Adams: One thing I want to point out is that, according to Freddie Mac and Fannie Mae, about 50% of the people who were in the subprime adjustable rate mortgages qualify for a prime loan at a fixed rate. But they were steered into the subprime market by mortgage brokers who were looking for larger payments for themselves, as opposed to what was in the best interest of the homeowner.
Brown: You know, there has been a lot of, I guess a push, you know, for a while, for people to become homeowners, that it’s better for them economically to become a homeowner. And is the subprime crisis, the foreclosure crisis, sort of a result of that push, or can we say that there is a connection between trying to get people in the homes because it’s better for them and their families, it leaves a legacy? But, at the same time, there’s this issue of not always being really prepared for the payments and for the responsibility. Ms. Gilmore?
Gilmore: Well, you know, you hear all of the time that home ownership is the American dream. Everybody wants to own a home, but not everybody can afford a home by tomorrow. And there are things that you need to do before you purchase that home. You need to, number one, go to a housing counseling agency, and that’s what we are. You go to the agency, find out, you know, how your credit is, get a credit report done. And then credit counseling agency would actually educate you on what it takes to get in the home, how much it’s going to cost you, and what it’s going to take for you to stay in the home. So education is the key, really.
Brown: And, yes, Ms. Adams?
Adams: And one thing to point out is people who went through the housing counseling process are not participants in this foreclosure price.
Brown: Okay.
Adams: The folks who went through the education process who took the advice of the counselors are not facing these foreclosures. It’s folks who were inpatient, who wanted the house now as opposed to taking the advice to wait six months or wait a year to get their credit improved, that find themselves in this crisis. And part of that is that when a legitimate lender or a housing counselor said, “Well, you’ll have to—you can qualify for this much house at this interest rate.” And they went to a broker, who says, “Oh, no, you can get this much house for this interest rate,” without telling them that the difference in that payment is the fact that there’s no property taxes and insurance taken out, that the payments difference is a quality difference in the loan. And so a lot of people were steered into products that weren’t good for them and were steered away from the good advice. But those who went to—most of the people who went to counseling agencies are not caught up in this crisis.
Brown: Ms. Gilmore, who is targeted, if we can even say that, and pushed towards the subprime products as opposed to the prime loans?
Gilmore: More of the low-income, more of the low-income families. But, for the last few years, I see that everybody is targeted. The African American community, all of the communities, as long as, you know, the money is an issue for the realtors, the brokers, for the banks, you know, that’s the issue. So they—I mean, they’ll get anybody in a home that they can. You know, but, like I said, if you would get that education, just wait, you know, clean up the credit issues, pay off the old debts, and then get that education that they need, they would know what it’s going to take, exactly how much house they can really afford. And they know their income, what it’s going to take them, like I said, to get into the house and what it’s going to take them to actually keep the house.
Brown: Now, this brings to mind a question that I’ve heard raised before, and that is whose fault is this foreclosure crisis. I mean, can we—do we blame the people who don’t wait, don’t get the education, and end up in these products that are not good for them, or is it the fault of the mortgage industry?
Adams: There’s plenty of blame to go around, but I’m not one to blame the victim, and that is what the majority of the borrowers are, the victims here. Many of these borrowers qualified for prime loans. They qualified for fixed rate products, and they were steered into products that were not appropriate for them. And that’s why we’re seeing this crisis. And they were steered there because the marketplace, the brokers had no duty to the borrower. The borrower, I go to you as a borrower, and I’m like, “How much house can I afford?” I’m assuming that no bank is going to lend me money; I won’t pay that. Okay.
That you’re going to tell me, if I asked you how much I can afford, you’re going to tell me what I can afford. And if you tell me my payments are going to be $400 a month and I can afford $400 a month, but you fail to tell me that in three years my payment is going to be $800 a month, and I wake up one day and find that out, that’s not my fault. That’s the lender’s fault. And when you have the number of elderly people who are on fixed income that were put in adjustable rate mortgages by brokers, well, they’re on a fixed income, so there’s no way they were going to be able to deal with adjustments.
So, the fault is all along the food chain, but we can’t—everyone has been bailed out of this crisis except the victims. Bear Stearns was bailed out. The lenders have been bailed out. The investors have been bailed out. But no one has come up with any kind of solution that’s beneficial to the victim. So, and one thing I want to point out is that there are 2.3 million families subject to foreclosure this year. Now, a disproportionate number of African American borrowers are in that number, but we only make up about 400,000 of those. Okay, about 1.9 million families are white families, are middle class families, are upper income families. You look around the Triangle, and you’ll see foreclosure signs going up in almost every neighborhood.
And it’s not just so—the beginning of this crisis, the canaries in the coalmine were the low-wealth African American borrowers. But this crisis is going to continue into 2012, with the second spike coming in 2011. And those are going to be prime borrowers who have these option ARMs and have these other kind of exotic products. Right now we’re dealing with the subprime part of this, but the prime foreclosures are going to come—it’s coming.
Brown: Let me jump in and ask—because I’m sure some of our viewers are going to wonder—isn’t it the responsibility of a borrower, when they get the paperwork, to read through it and make sure they understand exactly what they’re signing, Ms. Gilmore?
Gilmore: Well, it is, but, I mean, even me, being an educator, and telling them what’s going wrong, we don’t read every little thing that’s on there. And sometimes, when you’re going to the attorney’s office to do the—to closing, of course they’re going faster, and they’re saying, “Sign here.” And they explain it to them, but a lot of times, you know, you’re just so anxious in getting the keys that you just don’t hear what’s going on. And later on you’re excited. You don’t get a chance to read the paperwork because you’re trying to move in.
And then, of course, after that, you know, what we say: out of sight, out of mind. We just don’t think about going back to read the papers. But once you sign on the dotted line, it’s actually too late to go back. And whenever—not all loan officers, the banks do, however, will give a good face estimate and the truth in lending, but do you understand what the truth in lending is? I mean, so not everybody would even understand that. So, not taking the time to get the education that we talked about in the beginning is the most important piece. Because we talk about that in the homebuyer-ed classes before they get to the bank. So if they would come to the homebuyer-ed classes in the beginning, we can explain what the good faith is, we can explain what the truth in lending is, and we can explain all of the terms that are within the loan that they don’t understand. So, you know, education is the key. And, you know, if you don’t learn it, you won’t know it.
Brown: Well, I want to segue here to some tips that we have that we want to share with our viewers to help them if they are in foreclosure, or to help them stay out of foreclosure. One tip is: don’t ignore the problem. And I think that’s probably one of the key things that we probably need to get across. Ms. Adams, would you address that quickly?
Adams: Yes. Most people, when the letter comes in the mail, they just ignore it. But 50% of the people who contact their lender can avoid foreclosure. If you just pick up the phone, make the call to the lender or make—I recommend that you make the phone call to the lender but you also contact your local housing counseling agency so that they can negotiate for you and work with you to explain what’s going on. But don’t ignore it. As soon as you know that you’re not going to be able to make a payment or that your circumstances have changed, contact a local housing counseling agency or contact your lender. It will help you. That gives you the best shot at saving your home.
Brown: And let me just stop here and say, or ask, if you contact a housing agent, or a housing counseling agency, is there a fee attached to that agency becoming involved in your case, Ms. Gilmore?
Gilmore: Generally, no. We are nonprofit. We’re—there’s usually just a minimal fee. Our fee, at Kingdom Community Development, is $30 just for the application and pulling the credit, because, you know, we pulled a tri-merge credit report, and so that’s the minimal fee. I would say any housing counseling agency, the most the fee would be would be $50 to come, whereas they could get information in the mail to say, “I can fix your credit. I can do this to your credit.” And they’re charging them $250 to $300, and they can’t do anymore than the client can do themselves or the housing counselor can do.
Adams: And it’s very important for people to go to a certified housing counseling agency, certified meaning approved by HUD. And there’ll be a phone number in the letter from your lender that to call the certified counseling agency, and it’ll put you in touch with the closest one to you. And that’s who you deal with. You do not want to deal with these foreclosure scam artists who say, “If you give me $3,000, I can fix it.” If you had $3,000, you could pay that on your mortgage and you would be able to save your home. So, you don’t pay those kind of fees. Again, most of the housing, the legitimate housing counseling agencies in this state don’t charge any more than $50, and that’s mainly to pull your credit report. That’s not for any other purpose.
Brown: Let’s go and look at a few more tips that we can share. One of them is to prioritize your spending. Ms. Gilmore, what do we mean by that?
Gilmore: I always say budget, budget, budget. You know, check your budget before you go out to the mall and spend two or $300 of your paycheck, or check your budget before you go out and even purchase that new car or any big ticket item that you might want. You know, make sure that it’s going to be affordable. You know, put your priorities in place. You know that your mortgage has to be paid, your electric and your phone bill, and you have to have gas in your car. Those things are essential, and all of the other things are just extras that you might have. So prioritize your spending.
Brown: Would you say that credit card debt, other types of debt that consumers have, is contributing to the crisis, or is it really just about people are getting—getting loan products that are not good for them and, as a result, they can’t pay them?
Gilmore: Credit card debt could be one of the problems because, a lot of the credit cards, the interest rates are very high. Eighteen is low. Some of them are 21, 25. I mean, take Sears, for instance. I don’t care how good your credit is, Sears is going to charge you a 25% interest rate. So if you have a couple Sears cards and some of the other stores, store cards, which is, you know, at least 18% or higher, of course that could contribute to you going into a lot of debt that you really don’t need at this time. So, if you would watch that and see, you know, can I really afford to get this.
Brown: And be honest with yourself, right?
Gilmore: Be honest with yourself. You know, can I afford to go out for dinner and take some friends and spend $50 this weekend? You know, I need to make my car payment, I need to pay my mortgage. So that should be the first thing that you think about.
Brown: And I wanted to go back to you, Ms. Adams, because you mentioned, you know, that the next spike in this crisis is coming in 2011, I think you said. And you mentioned that prime mortgage, prime loan…
Adams: Prime borrower.
Brown: Prime borrower, thank you—are the next in line for this. Explain what you mean by that and why it sounds like all of us need to be concerned about this crisis.
Adams: One of the things that happened in the prime market is that they too participated in the adjustable rate crisis, but they got into it later. The other thing that happened in the prime market is that they had access to what we call exotic mortgage products. One of the ones that was available primarily to prime market borrowers was the pay option mortgage. And what this mortgage did was you were allowed to make minimal payment that did not even pay the interest on the loan. It was at a teaser rate, usually 1% to 3%. And what happened was the mortgage brokers and the lenders were underwriting you on 1%. Well, all of us could qualify for a 1% mortgage!
[LAUGHTER]
Brown: I know, right. Okay, right.
Adams: But that teaser rate only lasted between one and six months. You were allowed to make that minimum payment, though, up to a year. Then you had the option of paying it interest-only paying, so you weren’t paying down any principal. Or you had the option of paying a fully amortizing loan but no principal—no taxes and insurance. Or then you could pay the fully amortized, with taxes and insurance.
Brown: Now, let me just stop you there because I think I know I get confused about amortization and what exactly that means. Is the last option that you just mentioned the ideal one?
Adams: The last option is the ideal one, but it’s also the most expensive. So you’re fully amortized loan, paying your taxes and insurance, might be $1,400 a month. Your fully amortized loan without the taxes and insurance might be $1,200 a month. The interest-only would be $1,000 a month. The minimum payment is $800 a month. And each month you get to choose whether you pay $800, $1,000, $1,200 or $1,400. Guess what the majority of people chose?
Brown: Right, they’re going to choose the lowest.
Adams:They chose the lowest. Their payment coupon says “balance due, minimum payment.” It did have, where you could see it, what the other payment options were, but it didn’t encourage you to pay that higher amount.
Brown: Pay more.
Adams: And most people didn’t understand that once you’ve reached a certain—because the 800 is negative amortization. It means that you’re going into more and more debt each month. That once you hit a certain level of debt, you kicked right up to the $1,200.
Brown: Well, I got to…
Adams: And that’s what’s going to happen in 2011.
Brown:That’s what’s going to happen in 2011. So it sounds like we need to get that education that you were talking about. I thank both of you so much for sharing your expertise with us today. It’s been very, very informative. And if you’d like to get in touch with our guests or obtain a transcript of today’s show, visit us online at unctv.org/bif. And when you visit, be sure to give us your comments and program suggestions. You can also call us on the BIF line, at 919-549-7167. Be sure to meet us right back here each week for more on the people and topics that concern you. For Black Issues Forum, I’m Natalie Bullock Brown, reminding you to be encouraged no matter what. Peace and blessings.
VO: Quality public television is made possible through the financial contributions of viewers like you who invite you to join them in supporting UNC-TV.
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