Oregon is doing better than the national average but we're not out of the woods yet

By BENNETT HALL

Corvallis Gazette-Times

Lori DeBord knows how to keep a lot of plates spinning. A 40-year-old mother with three boys, she kept the bills paid by running her own small business, the Albany Dance Academy. A side job as a dance team coach and disability payments for her oldest son's medical condition made the family budget stretch.

Last August DeBord sat down with a mortgage broker and stretched a little more, taking out a subprime loan to buy her first home, a modest 1,200-square-foot condo in southeast Albany. The interest rate was high - 9.75 percent - but she figured she could swing the monthly payments.

It was a proud moment, but it didn't last. First she lost her second job, then her son's disability benefits. Now she's six months behind on her mortgage payments and on the verge of losing her home to foreclosure.

"I gave up," she said. "I just went, 'I don't have the money.'"

DeBord's situation is not unusual. Thousands of Oregonians have subprime mortgages, the kind that have been making bad-news headlines nationwide.

And while rising home prices have so far helped Oregon avoid the waves of foreclosures that have pounded some parts of the country, consumer advocates say a cooling housing market and our state's lack of legal protections for borrowers add up to trouble ahead.

Balancing risk, reward

It's important to note that most borrowers never default on their loans. But subprime loans carry a much higher risk of default. In Oregon, subprime loans are 11 times more likely to be in foreclosure than prime rate loans, according to a recent study commissioned by NeighborWorks America.

By definition, subprime mortgages are loans to high-risk borrowers - people who might be single parents or self-employed, like DeBord, or whose credit history shows a pattern of late payments. To balance their risk, lenders require higher interest rates. Some borrowers, in turn, are willing to accept higher rates as the price of getting into a house, especially with the recent proliferation of government assistance programs for first-time homebuyers.

Subprime lending soared during the real estate boom of the last several years, especially after Wall Street got into the game and began buying and selling securities backed by subprime mortgages. Suddenly, billions of dollars were available for making subprime loans, and lenders could cut their exposure by selling risky loans to investors.

As the subprime lending industry grew, critics say, so did the number of unscrupulous lenders and mortgage brokers who pushed bad loans to pad their profits. The nation's largest subprime lender, Ameriquest Mortgage Co., is paying $325 million to settle a predatory lending lawsuit involving 481,000 consumers in 49 states.

Among other things, the suit claimed, Ameriquest and its affiliates:

• misrepresented or failed to disclose loan terms, such as whether the interest rate was fixed or adjustable;

• charged excessive origination fees and prepayment penalties;

• refinanced borrowers into improper or inappropriate loans; and

• inflated appraisals used to qualify borrowers.

Almost 2,500 Oregonians qualified for restitution under the Ameriquest settlement.

Things could be worse

Statewide, some 7,330 new foreclosure filings were recorded in the first nine months of the year, according to RealtyTrac, a California real estate research firm. That's slightly behind the pace set last year, which finished with 9,573 new foreclosure filings, but already well ahead of 2005's 12-month total of 6,855.

The problem is much worse in other parts of the country, said Rick Sharga, RealtyTrac's vice president for marketing.

"It's just possible you're going to be spared from the worst of the foreclosure mess," Sharga said.

So far that's true, said Berri Leslie, the mortgage lending program manager for the state Division of Finance & Corporate Securities.

"Oregon has actually fared better than many other states, and we believe it is in large part due to continued appreciation of home values in our state," Leslie said.

But, she added, there are "pockets of concern" in places such as Medford and Bend, where home prices shot up rapidly in recent years. As the market cools, these could be the first to see spiking foreclosure rates.

In the mid-valley, the problem is worse in some places than in others.

"In Corvallis it's not that bad," said Tom Kosta, a senior loan officer with the Corvallis office of Meridian Mortgage. "It's a little harder hit in Albany, Lebanon and Sweet Home, where incomes tend to be a little lower."

Current data from RealtyTrac shows just 40 properties in various stages of foreclosure in Benton County. Linn County, however, has 255 properties either in arrears, scheduled for auction or already foreclosed by the lender.

Counselors at Willamette Neighborhood Housing Services, which offers a number of programs to help homebuyers, say they haven't seen a deluge of foreclosures yet, although they are getting more calls on the matter than they used to.

Some people get in over their heads in the excitement of buying their first home, said Ken Smith, homeownership program coordinator for the Corvallis-based nonprofit.

"Most people don't realize what they're getting into until they're at the closing table," he said. "Yeah, people should know better. But people don't."

Exploding ARMs and other hazards

But the real crisis is yet to come, warns Angela Martin of Our Oregon, an advocacy group pushing for lending reforms.

One of the most popular types of loan being sold on the subprime market is also among the most dangerous, Martin said. It's a 30-year mortgage that starts out as a fixed-rate loan, then converts to an adjustable-rate mortgage after two or three years.

These loans are known as "2/28s" or "3/27s" or, more ominously, "exploding ARMs."

The initial teaser rate might be fairly low - say, 5½ or 6 percent in today's market. When the loan resets to an ARM, it's pegged to a market bellwether such as the current interest rate on Treasury notes, plus several points. Suddenly, a 5½ percent loan might become a 10 or 11 percent loan, jacking up monthly payments by hundreds of dollars.

Many borrowers can no longer make their house payments and find themselves staring at default and foreclosure.

"They were stretching to make that monthly payment the first two years," Martin said. "When that loan goes up, they can't afford it."

So why did they sign up for such a loan in the first place?

"A lot of folks went into this believing the person that was representing them to get a loan was representing their best interests," Martin said. "The market was going well. Homes were sold on the promise that, yeah, you can't afford this now, but in a few years you'll be able to refinance."

What some borrowers failed to take into account were the punitive prepayment penalties attached to many such loans and often buried under layers of contract jargon.

If their home's value has appreciated quickly enough, they might be able to refinance, Martin said, but they won't have anything left to show for it after paying thousands of dollars in fees to the broker and lender.

"All that equity that you thought you could use to send your kids to college? You'll have to pay all that just to get your monthly payments down to where you can afford them," Martin said.

In Oregon, Martin said, there are roughly 40,000 families with "exploding ARM" loans that will reset to a higher rate this year or next.

"We're looking at a class of borrowers - a large number of borrowers - who are about to face their first payment shock," she said.

Reforms and second thoughts

In the face of rising foreclosure rates, 29 states have enacted limits on prepayment penalties, 27 now require lenders to underwrite the entire life of a loan and 25 have banned loans that permit interest-only payments.

Oregon is not one of them.

That may be about to change. The governor has set up a work group to propose model legislation for February's special session of the legislature, and two state lawmakers recently held hearings on mortgage lending reform.

Martin, who sits on the governor's work group, said Oregon needs to take firm steps to protect borrowers.

"There are things we can do," Martin said.

"We won't stop all the foreclosures. We won't stop all the pain. But we can make sure this doesn't happen again."

Reforms might eliminate predatory lending practices, but they can't protect everyone. Some loans will still fail, and some borrowers will still lose their homes.

Lori DeBord hasn't lost hers yet, but if she can't come up with $6,500 by Nov. 21, her condo will be auctioned on the courthouse steps.

She's tried to sell the place, but the only offers she's had to date are for less than she owes. And if she does sell, she's not sure where she'd move anyway - landlords are leery of renting to someone with a history of missed mortgage payments.

Her best option at this point may be a loan modification. She's asked her lender to consider restructuring her mortgage so the monthly payments would be more affordable and her back-due payments would be tacked onto the end of the loan.

So far, however, she's been unable to get a yes or no answer.

"They're not returning my phone calls, or they put me on hold for 45 minutes," DeBord said. "It's already the end of October, and November 21st looks like tomorrow to me."

Looking back on her own experience, DeBord wishes now she had been a little less optimistic about her ability to take on the responsibility of a mortgage - especially a subprime loan that came with a high interest rate. In hindsight, she simply wasn't prepared to handle the financial shocks of losing her part-time job and her son's disability checks.

"I just had nothing to fall back on," she said. "The 'what ifs' can happen. I'm a living example of it."

Bennett Hall can be reached at 758-9529 or bennett.hall@lee.net.