Adjustable-rate mortgages - Points to remember

Adjustable rate mortgages are the biggest reason that Pueblo has one of the highest mortgage foreclosure rates in the nation, says one local housing loan specialist.

Rita Godfrey works one-on-one with clients at NeighborWorks of Pueblo, a housing revitalization agency that promotes home ownership in Pueblo.

Last year, Godfrey helped 130 families purchase their first home.

She also works with many families facing mortgage troubles.

Pueblo's foreclosure rate for the 2006 third-quarter of July, August and September was one filing per 94 households, a bit lower than Denver's rate of one per 90 households. Denver's third-quarter foreclosure rate ranked third highest nationally among metropolitan cities, according to RealtyTrac, a California company that tracks foreclosures.

Godfrey said the most common factor among Puebloans losing their homes to foreclosures is the adjustable rate for mortgages. The second most frequent common factor, she said, is that homeowners purchase a home beyond their means.

"Now (that) the rates are adjusting (upward), they don't have the income (or) the means to make that new mortgage payment," she said.

Godfrey said some buyers she has talked with signed on to an adjustable rate loan because they thought they could handle the expense for a couple of years and then refinance to a fixed-rate loan. But what often happens is that new homeowners soon become burdened with more debt. Maybe they buy amenities they didn't need such as flat-screen TVs, hot tubs or major home improvements. In other instances, the families might have faced medical emergencies or other household crises.

Couple those circumstances with Pueblo home values that only appreciate by 3 percent or so a year and in a couple years time, the homeowner has no breathing room. They cannot qualify for a better fixed-rate loan.

In other cases, some people will finance 125 percent of their home loan during that first two years of ownership because they have so much debt. Unfortunately, they only qualify for the highest interest rate mortgage in an effort "to cash out to pay that (debt) off," said Godfrey.

Many homeowners must opt for an "80-20" arrangement to get their loan approved, she said. That means they finance 80 percent of mortgage debt with a first mortgage and 20 percent with a second mortgage.

But the deal comes at a high cost.

Godfrey said the first mortgage likely comes with an 8 percent interest rate and the second at 10 percent. Subsequently, she said, many households, even those with two income earners, cannot make two large payments.

Throw those situations together with predatory lenders, and many Puebloans soon find themselves in a downward spiral of debt that will affect their credit record for years, said Godfrey and Lionel, Trujillo, executive director of NeighborWorks.

The duo note that some loan officers work on commission and make more money on adjustable rate loans than fixed loans.

Godfrey cited the case of one loan officer who wrote up a loan offer with a 10 percent interest rate.

"I pulled his (the homebuyer's) credit report. There was absolutely nothing wrong with his credit report. He had had a $30 collection (arrangement) he had paid two years ago. He was told since he had a collection (action), he had to go into a 10 percent loan. Now, (with Godfrey's help,) he's getting a 6.1 (percent) interest, 30-year loan," she said.

Godfrey and Trujillo offer some more tips for homebuyers at risk of facing foreclosure:

Don't put off buying a home because of past credit problems and opt for a new car. Instead, get some credit counseling and buy a home. As a homebuyer, you'll get a better credit deal on autos and other big purchases.

Do some research before buying a home. Take a homebuyer's course and figure out what kind of a payment and budget you must keep in order to be a homeowner.

Get at least three good-faith estimates on loans before signing anything and make sure you understand what kind of loan you are buying. Godfrey said she's met with several clients "who don't even know they're in an adjustable rate loan."

NeighborWorks officials cannot direct clients to lenders but as a HUD counseling agency, it can provide people with a "participating lender list."

"There are a lot of reputable lenders, you just have to find them," Trujillo said.

At NeighborWorks, which also is a CHAFA counseling agency, homebuyers are counseled to contract for a 30-year, fixed-rate loan to keep payments low, and, therefore, minimize their foreclosure risk.

Recent homebuyers shouldn't go for any offers for credit cards or new predatory home loans for 100 to 115 percent of the home's value.

Don't live on the financial edge. Have a savings plan for major purchases such as furniture, electronics, and the water heater and furnace that eventually will go out, as well as disabling health situations. A homeowner who couldn't work during three months of chemotherapy for cancer was one situation on Godfrey's mind.

If you think you may get into financial trouble, get some budgetary counseling.

If you miss a mortgage payment, immediately contact your lender or NeighborWorks or another HUD counseling agency. There are several options available to get back on track within a 90-day timeframe. NeighborWorks officials will try to negotiate a forbearance plan to help homeowners get caught up; FHA-insured mortgages offer different recoup options.

Don't be like many people Trujillo and Godfrey have met who won't even open their mail from their lender "for fear from foreclosure" after they've missed payments. Once they do, they're shocked at the costs for attorney fees, costs penalties.

Contacting a lender or an agency for help is extremely critical. Once 90 days passes, it comes very difficult to save the home, with much more attorney fees, penalties and costs involved.