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Keeping Your Piece of the American Dream

Terry Savage

Let’s stop blaming the people who took the bait (and switch) and thought they’d landed their piece of the American dream. Home ownership has always been a goal of most Americans. Who could resist an offer to make that dream affordable?

Playing the Real Estate Game

Essentially, that’s what happened to millions of families who took out a significant portion of the $1.3 billion subprime mortgages outstanding today. Sure, some of those loans were taken out by scam artists, who had no intention of owning the homes for long. Others figured on "flipping" the property at a higher price to the next dreamer. They had a good example: Everyone from Donald Trump to graying yuppies had been playing the latest national "get-rich-quick" scheme -- buying and selling residential real estate.

But when the dust settles and all the blame is cast, it's very likely that the real losers will be the families who were attracted by ads run in newspapers and on local radio by mortgage brokers who promised low monthly payments, no money down and a chance to buy the dream house financed only by dreams.

The Path of Greed

Fully 52% of subprime loans were originated by nonregulated mortgage brokers, who fall through the cracks between federal and state regulation. As originators, they presented the contracts, which were then underwritten by small mortgage companies. The individual mortgage brokers received a cash fee for every loan they originated.

The greed moved quickly upstream, as the mortgages were securitized --packaged for sale to larger institutions that would ultimately do two things with the loan. First they kept, or sold, the servicing process, the collection of monthly payments on those loans, which earned significant fees. Then the future income from payments on these loans was packaged and sold to investors, who were eager to get higher interest rates than those currently available on Treasury securities.

The greed spread. The investors knew that these were adjustable-rate mortgages, and would bring an ever-increasing monthly income to them. In some cases, little or no documentation was required – either of borrowers’ income or the purchase prices. The investors never met the borrowers – individuals from small towns and large cities, who were told they could now make affordable payments to own their home.

Awakening to Reality

Very few homeowners read the fine print. Surely, no one read it to them. Very few understood that adjustable rates could translate into much higher monthly payments. In fact, for many homeowners, the monthly payment doubled, either because the unrealistically low "teaser" rates expired, or because the Fed raised interest rates.

Last summer, I heard from a woman in Mississippi who had refinanced her home as part of a divorce. The monthly payment was only about $500. But in just over a year, she was told her payment would jump to more than $900 a month! She couldn't find the original broker. In fact, the mortgage company that the broker worked for was no longer in existence. She was dealing with one of the huge banking institutions now making headlines.

This was a reasonably intelligent woman, who was trying to support herself and her son and keep her home. She had never lied to get her mortgage. No one ever told her the monthly payment could double. She was caught in the switches. So I helped her contact the large financial institution that was now holding her loan, and I learned a few interesting things in the process.

What to Do if it Happens to You

Financial institutions do not want the expense of foreclosure, or the statistics of one more mortgage default on their books. They're willing to work with you if you don't wait too long. Here's what to do now.

• If you have an adjustable rate mortgage, good credit, and enough equity in your home, refinance to a fixed-rate mortgage now.
• If you’re lacking either creditworthiness or equity in your home, contact your lender immediately. Ask to work out a lower monthly payment, fixed at the original rate, before you become a statistic!
• Contact the company that is currently holding your mortgage, not the original lender. That original broker or lender has sold your paper and doesn’t care anymore!
• If you’ve moved past the early stages, or if they won’t negotiate, contact local community groups that work on housing issues. To find the nearest office of Neighborhood Housing Services, the national, non-profit housing advocates, go to www.nhsofamerica.org. (Full disclosure: I’ve been involved with NHS for years.)

You're not alone in your problem. A lot of people have a lot to lose if you lose your house -- whether they’re financial institutions, investors, builders and workers in the housing industry who don't want to see a flood of homes for sale, or simply your neighbors. That’s why there's a good chance that you won’t have to take the blame, or lose your home -- if you act quickly. And that's The Savage Truth.