Maine Mortgage Holders Caught in a Trap

Maine mortgage holders are finding it harder to keep their homes, as many people become squeezed between loans they cannot repay and lenders who are offering fewer financing options.

The rate of delinquency on mortgages statewide rose 0.76 percentage points during the final three months of 2006, the second-highest rate of increase in the country, according to the Mortgage Brokers Association. Nearly 5 percent of all Maine home loans were past due, with 2.11 percent seriously delinquent, meaning they were either more than 90 days past due or in foreclosure.

In the subprime market - loans for people with marginal or poor credit histories - the numbers are worse. MBA’s survey found that 8.3 percent of those loans in the Maine housing market were seriously delinquent in the final quarter of last year and 14 percent were past due.

These numbers suggest that many Mainers, who have one of the highest rates of home ownership in the country, are struggling to make their mortgage payments amid a slack economy and flat - in some cases declining - home values.

Maine’s experience reflects a national trend of more people falling behind on their mortgages and facing the very real threat of losing their homes.

“You have loans happen that should not happen,” said Will Lund, who heads Maine’s Office of Consumer Credit Regulation. “There’s no doubt that we will see an increase in foreclosures.”

Lawmakers in Augusta and Washington are rushing to force lenders to tighten their standards for loans and limit the kinds of mortgages that can be offered, hoping that the problems caused by foreclosures can be confined to the finance industry, without spreading to the broader economy. But for individuals who are in the most dire straits, these stricter rules may shut off one popular method for buying time and forestalling foreclosure: home mortgage refinancing.

For most of the decade, the hot housing market meant home-owners easily could refinance their homes. Many took on larger mortgages in order to tap into the equity they’d built up.
Some of these homeowners took out adjustable-rate loans, figuring that they could simply refinance again before the rates went up. And many of those refinanced loans were made in the subprime market, to people who might not have been able to afford a conventional, fixed-rate loan.

Lenders have developed a variety of loans that appear to offer easy terms for those viewed as credit risks. In the end, however, these products often set up borrowers for financial hardship.

The loans include 2/28s, which offer a low home loan rate for the first two years and then adjust upward, sometimes every six months, over the next 28 years. Other loans allow borrowers to pay only the interest for an initial period, leaving the principal untouched and causing “payment shock” when the full bill kicks in. There are even some loans that allow the borrower to set the payments for the first few months, which usually results in more unpaid interest piling up and even higher monthly bills later.

Hidden Costs: Donna Gillette’s case illustrates how easy it is for a mortgage to become a major financial problem.

The 63-year-old L.L. Bean employee said she started looking for a house in early 2006 and quickly found one that she liked in Sanford. The price was $165,000 and the mortgage broker, she said, suggested she see a loan officer at Residential Mortgage Services to arrange financing.

Her credit, Gillette said, “wasn’t in the cellar, but it wasn’t spiffy either.”

The loan officer said she could get an adjustable-rate mortgage, with no money down and a starting interest rate of 8 percent. Papers were quickly brought to Gillette to sign, and she left the office feeling like everything was set.

A few days before the closing, though, the loan officer told her that the rate had to go up, to 10 percent. After a few years, Gillette learned, the interest would rise to between 11 and 16 percent.

“I was already emotionally tied to this house,” she said, and went along with what the loan officer told her, including picking up some papers she needed at a commercial lender in Kennebunk.

It turns out the Kennebunk papers included a note for $30,000, due in six months, unless she paid $900 twice a year to renew the note. Gillette said she had no idea why she needed the note and was further amazed when her loan officer said she could get some cash back at the closing.

She later found out that the loan papers had listed her income as $60,000 a year, when it was half that, and that she was putting $21,000 down on the house, when she wasn’t putting anything down.

Gillette said she ended up with initial home mortgage loan payments of $1,274 a month, which she could barely make, that would soon jump to $1,400 and then $1,500.

‘BAD LOANS ARE MADE’
James Seely, the president and chief executive officer of RMS, said he subsequently fired the loan officer, has reworked another 10 mortgages that the officer wrote and is working to refinance two others because the terms were so poor.

“The essence of the problem in our industry (is that) in good times, bad loans are made,” said Seely, who noted that he’s limited his portfolio in subprime mortgages to about 4 percent of his volume because of the growing problems borrowers have in meeting payments.

Seely said he would welcome more state regulation of the mortgage lending industry.

“It’s the easiest state in New England to get a license,” he said of Maine. “I think there needs to be more liquidity and stricter licensing requirements on the part of the state.”

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