 New government data now show a nightmare scenario that economists
have suspected: that most of the borrowers with low credit scores
turned their homes into a virtual credit card.
Proponents had once touted subprime loans as a way for some consumers to afford the American dream of homeownership.
Yet new government data now show a nightmare scenario that economists
have suspected: that most of the borrowers with low credit scores
turned their homes into a virtual credit card.
Monmouth and Ocean counties led the nation last year in the percentage
of borrowers extracting cash from their houses, usually through
refinancing or home equity loans.
A staggering seven out of 10 high-risk borrowers in both counties —
those with low credit scores — refinanced loans to obtain extra cash,
Federal Reserve data for the end of 2007 showed. Those are the highest
percentages in the nation among large counties with more than 2,000
subprime loans. New Jersey had five counties in the top 25.
Such mortgage debt will continue to weaken the housing market at the
Shore and around New Jersey this year, experts and consumer advocates
say.
"It's no secret that we live in a credit-dependent society," said Brett
Lopes, vice president of Intercounty Mortgage in Hazlet. "In the same
way that people don't handle credit cards correctly, they perceived
their house was worth more and more and they used it like a credit
card."
Consumer advocates and regulators also contend many lenders did not
properly vet borrowers, lending money to people who never should have
obtained loans.
Nationally, more than half of subprime borrowing — 54 percent — was a
result of cash-out refinancing. Subprime loans carry higher interest
rates and are usually given to people with weak credit histories.
The Federal Reserve data showed that:
Forty percent of the 10,800 subprime loans provided to homeowners in
Monmouth and Ocean counties were given without full documentation of
income, and the average credit score was about 610, far below the top
score of 850.
Forty percent of subprime borrowers at the Shore are also behind on their loan payments. Eleven percent are in foreclosure.
The nearly 79,973 subprime borrowers in New Jersey owe an average of
$250,614 on their loans, the fifth highest balance in the United
States. That's about $20 billion in subprime loans.
Marvin Smith, an economist with the Federal Reserve Bank of
Philadelphia, said new research shows that many subprime borrowers who
now face foreclosure previously had good credit and lower-rate mortgage
loans.
They had run into financial difficulty — either with credit cards or
medical bills — and then they tried to use their house to consolidate
the debt and bail themselves out, Smith said.
"In some cases, when someone ends up in foreclosure, they refinanced
more than once," Smith said. "They were trying to stay ahead of the
curve."
Smith said it is not usually advisable for homeowners to use mortgages
to pay off credit card debt because the debtor pays more over the life
of the loan.
In addition, the homeowners run a great risk of foreclosure if they continue to run up credit card debt, he said.
Nonprofits that help borrowers in trouble report continuing calls for help this year.
But Toi L. Collins, director of housing counseling at the Affordable
Housing Alliance in Eatontown, said many homeowners in trouble are not
doing what they need to do to shore up their finances.
Collins said she recently heard from a woman who owned a $600,000 house
in Fair Haven who was facing foreclosure. After a long telephone
conversation, Collins couldn't convince the woman to come in for help
in negotiating with her lender.
"You go through the whole spiel about what they have to do, then you
don't hear from them again," Collins said. "They just want to bury
their head in the sand and not even deal with it. They get letter after
letter from the loan servicer. . . . They don't know what it says; they
don't know where they are in the process."
State data showed many homeowners have not found help or improved their
finances; foreclosures filings in 2008 are on a pace to surpass last
year's high.
There were 12,376 foreclosure lawsuits filed in New Jersey Superior
Court in the first three months of this year, state officials said
Friday. If foreclosures continue at that rate for the year, there would
be nearly 50,000, double the number from just two years ago.
Foreclosure lawsuits are usually filed after homeowners have missed several payments.
There were 36,358 foreclosure lawsuits filed in state Superior Court
last year, up by 46 percent from 2006, according to state data.
In Monmouth and Ocean counties, 5,102 foreclosure lawsuits were filed
last year, up 42 percent from 2006. Local figures for 2008 were not
immediately available.
Congress and President Bush continue to wrangle over details of
proposed bailout packages that could cost upwards of $40 billion.
U.S. Sen. Robert Menendez, D-N.J., has proposed a bill to expand
federal grants to credit counseling agencies. In New Jersey, state Sen.
Ronald Rice, D-Essex, has proposed a bill that would require lenders to
pay a $2,000 fee when they begin foreclosure proceedings. The money
would be used to fund credit-counseling agencies.
P.G. Waxman, a Lakewood real estate broker who has tried to help
troubled homeowners sell their houses, said he now believes homeowners
with weak credit should undergo mandatory financial counseling before
they obtain a mortgage.
"People with (a credit score of) 600 should be cautioned," Waxman said.
"They should be given money slowly. They should be told, because
obviously they've had problems before."
If foreclosures rise, then those who lose their houses will need places
to rent, said Phyllis Salowe-Kaye, executive director of New Jersey
Citizen Action, a consumer advocate group.
Salowe-Kaye said she hoped government would fund community groups so
they could buy some of the foreclosed homes and convert them to rental
units. And renting, she said, would be the best way for former
homeowners to restore their finances so they can own a house again.
"People need to take the time to fix up their credit and (later) get a fixed-rate loan with loan counseling," she said.(app)
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