Asbury Park Press

Borrowers Used Houses To Get Cash

They added to their debt despite low credit scores

Asbury Park Press — Sunday, April 13, 2008


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.

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