Bad Credit Mortgages Push Massachusetts Foreclosure Rates to Record Highs

An explosion in overdue mortgage loans tailored specifically to home buyers with bad credit has driven foreclosures to record highs in Massachusetts, the Boston Globe reports today.

These mortgages, known as subprime loans (or bad credit home loans), charge higher interest rates to compensate the home loan lender for higher risks associated with customers who have low credit scores or large debts.

In the first half of this decade, bad credit mortgage loans were lauded for helping more Americans than ever buy homes. But now, five years after their popularity took off, many of the home loans are backfiring.

More homeowners are no longer able to afford their mortgage payments, which typically rise sharply two years into the home loan. In 2006, lenders filed 19,487 foreclosure notices against Massachusetts homeowners, surpassing the record high of 17,000 filings in 1991.

Research by the Federal Reserve Bank of Boston on the rising tide of foreclosure filings in the state found that bad credit home loans are a major culprit.

While such loans make up 12 percent of all mortgage activity in the state, they accounted for more than 67 percent of foreclosure filings in the third quarter of 2006, the most recent data available.

Most delinquencies were tied to subprime loans with adjustable mortgage rates, which increase payments as interest rates rise.

Historically, one in four homeowners threatened with foreclosure actually loses a home. Foreclosure is a legal process that takes six months to two years from the initial filing to the sale of the home in an auction.

Most homeowners either renegotiate a payment plan with their lender or sell their house to pay off the loan. But when home values decline, as they did last year, the options become limited.

Tammy Amado obtained a second mortgage to buy a two-family home in January 2005 from Fremont Investment & Loan, one of the largest subprime lenders in Massachusetts. Despite having a good job as an apartment manager, she fell behind on her payments.

“I’m trying the best that I can,” said Amado, who found a second job last year as a tax specialist.

The interest rate on the bigger of the two Massachusetts mortgage loans, for a total of $380,000, was initially 6.4 percent and would rise after two years, according to her loan documents; a second, $89,000 loan had a permanent 11 percent rate.

Her combined monthly payment: $3,225, the documents show.

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