Fear of Foreclosure: Millions of Americans Are Trapped in Unaffordable Mortgages

Aaron Pridgen faces foreclosure after borrowing to make hurricane repairs and repay medical debt. Joshua Lutz

Now that he’s sold his 18-foot boat and his gun, Travis Munnerlyn says he has nothing left to peddle to raise money for the thousands of dollars he’s behind in mortgage payments.

The Munnerlyns borrowed on their home to build a room for their grandsons. Then their ARM adjusted upward. —Photo: Joshua Lutz

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Two years ago, Munnerlyn and his wife, Patricia, refinanced the modest Orlando, Fla., home they’ve owned for 17 years to tap into some of their equity. They used the money to add a bedroom for their two young grandsons, whom they had adopted. But the self-employed security guard says he didn’t anticipate that his new adjustable-rate mortgage (ARM) would raise the monthly payment by nearly $500 when it was reset — at about the same time as his wife lost her job. “This has taken a toll on us,” says Munnerlyn, 60. “At times, I thought I was having a heart attack. It’s horrendous.”

Today, like millions of other Americans trapped with unaffordable mortgages, the Munnerlyns have been desperately trying to stave off foreclosure. And their saga is typical of older adults caught up in the nation’s mortgage crisis.

Eager to turn the equity accrued over decades into cash, and enticed by attractive teaser interest rates, many older people refinanced into risky or less-than-favorable mortgages, say legal and consumer advocates who counsel older homeowners. Most used the money to remodel, pay down medical debt or supplement a fixed income.

The Mortgage Bankers Association (MBA) says half of all mortgage applications in 2006—about 14 million—were from those seeking to refinance.

“Homeowners 75 and older are the fastest-growing group of people who refinance,” says Len Raymond, founder of the nonprofit Homeowner Options for Massachusetts Elders in Boston, which counsels people age 50 and older who are threatened with foreclosure. “I’m shocked by the number of elders who succumbed to predatory refinancing — interest-only loans and adjustable-rate mortgages. More than half of my clients are facing displacement.”

Today, nearly 3 million mortgages are delinquent or in foreclosure around the nation. Last year, foreclosures rose by 75 percent from 2006, with the highest casualties in Nevada, Florida, Michigan, California, Colorado, Ohio, Georgia, Arizona, Illinois and Indiana. The delinquency rate for home mortgages is 6 percent, the highest level since 1985, according to the MBA.

And there’s a spillover effect: A report by the nonprofit Center for Responsible Lending (CRL) says foreclosures drive down the price of neighboring homes by about $5,000. The center estimates that more than 40 million homes around the country will lose value due to foreclosures nearby — a drop that could disrupt the plans of those who are counting on their homes’ worth for retirement.

The situation calls for a “vigorous response,” Federal Reserve Chairman Ben Bernanke told a bankers convention in Orlando in March.

But so far the government’s response has been anything but vigorous, charges CRL president Michael Calhoun. He called the Bush administration’s plan to “pause” foreclosure proceedings for certain borrowers for 30 days a “small step” that is unlikely to make a significant difference.

His group has joined the Consumer Federation of America (CFA) and others, including AARP, in urging lawmakers to pass a housing bill that would permit bankruptcy judges to reduce mortgage balances and set monthly payments based on a home’s current value, not on the original price the borrower paid.

“This would keep 600,000 or more families out of foreclosure,” says Allen Fishbein, director of housing and credit policy for the CFA. “It creates the same protections for homeowners that lenders, if they go into bankruptcy, have for themselves.”

President Bush opposes the housing bill and has called it a bailout for irresponsible lenders. The MBA also opposes it, saying it could prolong the recovery of the housing market.

But while the federal government debates, there is action on the state level. Minnesota has introduced legislation that would slow the foreclosure process and give owners more time to save or sell their homes. Massachusetts is trying to raise $250 million through bond sales to create a fund to help borrowers refinance and stay in their homes. And Illinois is creating a similar Homeowner Assistance Pool of $200 million that would help borrowers facing foreclosure refinance into more affordable mortgages.

Housing advocates around the country say many property owners became ensnared in the mortgage mess simply because they misunderstood the terms of their new loans. They didn’t know how high, and how often, their adjustable-rate mortgage payments could climb. They also were led to believe they could refinance before the adjustable rate reset.

“As long as housing prices kept going up, lenders kept coming up with these crazy mortgage products with mortgage rates that were going to adjust out of sight,” says Jean Constantine-Davis, a lawyer with AARP, which is involved in a dozen lawsuits alleging predatory lending. “The loans are so complex you can barely understand them. People were routinely told to come back and we’ll refinance you in a few years. And they believed it.”

Eleonora Romachkan was a believer. When she bought her $225,000 townhouse outside Sacramento, Calif., in 2005, she was certain she’d be able to refinance before the adjustable rate reset—if she needed to. Last year, her mortgage adjusted twice, raising her monthly payment from $978 to $1,852. She couldn’t get refinancing. Nor would her lender negotiate with her as she fought off delinquency.

“I was told the rate was adjustable, that it may go up slightly, depending on the market,” says Romachkan, 53. “It’s ridiculous. I’m not able to make such a big payment.”

Apparently, neither are many of her neighbors. Of the 20 homes nearby, five have gone into foreclosure in the last year. “It’s like a ghost town,” Romachkan says. “I worry I’m going to lose my house. My credit will be ruined, and at my age I wouldn’t be able to buy another house.”

In Las Vegas, where the foreclosure rate is among the highest in the nation, some people have simply walked away from their homes and from mortgages that were higher than their property’s value. Abandoned homes line neighborhood streets once bustling with families and the sight of “foreclosure bus tours” is not uncommon as prospective buyers and real estate agents cruise by, looking for deals.

Barry Gold, AARP’s Nevada associate state director, says his office has gotten calls from parents who say they’re being asked to bail out their children stuck in mortgages they can’t afford.

Barbara Buckley, executive director of Clark County Legal Services in Las Vegas, says 90 percent of her clients are holding mortgages up to $40,000 more than the value of their house, a plight echoed around the country.

“Not since the Great Depression have so many people had homes worth less than what they paid,” says Mark Zandi, chief economist at Moody’s Economy.com. He says 8.8 million people — about 10 percent of single-family homeowners — have zero or negative equity in their homes. As a result, they can’t get refinancing.

“Unless there’s a way to help these people, I see a very bad year continuing in 2008,” says Buckley, who is also speaker of the Nevada state Assembly. “People don’t want bailouts. They’re willing to pay and make it right. They just can’t pay at these adjusted rates.”

Falling property values followed by hurricane damage pushed Florida resident Aaron Pridgen, 57, to the brink of disaster. He faces foreclosure on two homes in Fort Lauderdale—one he’s owned and lived in for 30 years, the other a rental property partially destroyed by Hurricane Wilma in 2005.

To get cash to pay for $20,000 in repairs to his uninsured rental property, and to pay down years of medical debt, Pridgen says he tapped into the equity and refinanced both homes with adjustable-rate mortgages. He also raided his 401(k) from his former job as a newspaper home delivery manager. He now collects disability for his chronic conditions and is considering filing for bankruptcy.

“I tried for a long time to talk to my mortgage company about why my mortgage jumped so high,” he says. “They wouldn’t even talk to me. I’ve been in my house so long, I thought I could work something out.”

In Lawrence, Mass., on the Merrimack River, Donald Blackington, 64, and his wife, Natalie, 62, are behind in their bills and living on a fixed income. They refinanced in 2006 to cash out some of the equity just to stay afloat. Now they’re delinquent on payments and face losing their two-story home of 30 years.

“We’re not eating well or keeping warm,” says Blackington, who, along with her husband, has myriad medical problems. “We keep our heat at 50 to 55 degrees and stay upstairs because it’s warmer. We eat eggs, canned soup and potatoes. I only buy the cheap ham and the cheap cheese.”

Blackington says that when their lender tried to force them out of their home recently, they sought help from the National Community Reinvestment Coalition. The coalition negotiated lower mortgage payments, something the Blackingtons had tried to do on their own but with no success. Still, it may not be enough.

“I worked my crackers off to get and to keep this house,” she says angrily. “I’m too old to lose it now.”