Foreclosures May Claim New Victims

NJBIZ — Friday, March 14, 2008


Skyrocketing home foreclosures jolted New Jersey mortgage lenders and other businesses last year and worse pain may lie ahead. "I'm seeing a lot of people walk away from their properties and surrendering them to creditors," says attorney John Hargrave, a court-appointed trustee who oversees personal and business bankruptcies and practices law in Barrington.

"An increasing number of [walkaways] were not even impacted by adjusting interest rates--instead they were probably overextended from day one."

Hargrave suggests that many home loans will wind up in foreclosure this year in addition to the adjustable rate mortgages (ARMs) on which the interest is scheduled to rise. "It's possible that 'flaky loans' were not limited to ARMs or interest-only and other products," he says.

"Instead, the once-rising housing market may have meant that a lot of people were approved for [traditional] loans that were actually beyond their means."

New Jersey home foreclosures jumped 46 percent to 92,482 in the first 11 months of 2007, compared with 63,476 in the same stretch of 2006, according to RealtyTrac Inc. of Irvine, Calif.

Many foreclosures have been linked to subprime borrowers--homeowners with weak credit ratings whose mortgages required little or no down payments and came with attractively low interest rates that were scheduled to rise within one to three years.

Such terms pumped up purchasing power and the borrowers expected rising home values to enable them to refinance their mortgages before the rate increases kicked in. But when the rates jumped and the home values fell, such borrowers found themselves stuck with mortgages that they could no longer afford.

Now, Hargrave and others are seeing a growing number of delinquent mortgages that are either fixed-rate or have not yet reset to a higher interest.

"People kept refinancing and pulling equity out of their property," says Hargrave. Such borrowers thought the run-up in home prices would continue, enabling them to either refinance again – and pull out even more money – or simply sell their homes at a steep profit when the bill came due. But they were caught short when housing prices stagnated in mid-2007 and then started to slide.

One bankruptcy case assigned to Hargrave this month involves a Pennsauken couple with a $219,849 mortgage on a house valued at $170,000.

He says the couple likely borrowed against their home as it rose in value and could no longer do so when the increases stopped. The couple now plans to hand the home back to the mortgage company, according to documents they filed with the U.S. Bankruptcy Court in Camden.

"Initially, the problems were with subprime, ARMs and other kinds of nontraditional mortgages," says Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, a Newark-based watchdog group that the U.S. Housing and Urban Development Department has approved to offer financial counseling services.

"We're still seeing those problems, but statewide they're spreading to middle-income and upper-income borrowers who overextended themselves with no-income verification, interest-only and other loans that were not considered to be subprime, or risky," she says. "Many of these borrowers should never have been given the loans they got, and more of them are losing their primary, vacation and investment homes to foreclosure."

The pain has spread to companies, too. The list of New Jersey casualties includes Agency Mortgage Corp. Inc., a Marlton-based lender that last month filed for liquidation under Chapter 7 of the federal bankruptcy laws. As the bankruptcy trustee for Agency Mortgage, Hargrave is winding up the company's operations and trying to salvage money to pay its creditors.

"Mortgage companies [like Agency] would write loans and then sell them to other entities [like Countrywide Financial Corp.] that would bundle and sell them to the secondary market," says Hargrave.

The bulk of Agency Mortgage's debt, about $3 million, is because of Countrywide, according to the Marlton company's bankruptcy petition. Countrywide is a California-based national mortgage lender whose stock has plunged about 89 percent in the last year on fears about its subprime mortgages.

"The secondary market for these mortgage packages dried up, and under Agency's contract [with Countrywide], Agency was required to buy back the mortgages," says Hargrave. "But Agency Mortgage doesn't appear to have the cash to do that.

"Generally speaking, it's been like a domino effect," he continues. When individuals started to default on mortgages, "Wall Street stopped buying secondary mortgage packages, and it dried up the revenue stream for wholesale mortgage companies. That's now choking off retail lending companies like Agency Mortgage."

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