Foreclosures are no longer just the business of cultural minorities, poor people and urban neighborhoods, a new study by the Metropolitan Housing Coalition has found. And one reason for that could be a dramatic rise in mortgages with adjustable interest rates.
The study examined foreclosures in Louisville between Jan.1 and June 30 of last year, and shows not only that they have spread to suburban parts of the city, but that the sheer increase in volume could have the city barreling toward an epidemic. The Louisville neighborhoods with the most foreclosures during that period: Pleasure Ridge Park and Okolona.
Cathy Hinko, executive director of MHC, told a crowd at a press conference last Thursday that foreclosures are “a virus throughout our entire Louisville Metro.
“There is not a person in our community who will not be affected by this,” she said.
Hinko also said the rise in foreclosures could cause surrounding properties to decline in value, and further burden already-heavy city and state budgets.
Since 1996, foreclosures in Louisville have grown 700 percent; in fact, 2007 is expected to yield the highest number of foreclosures the city has ever seen.
The crisis in Louisville underscores what is perhaps the most active contributing factor to the sluggish national economy right now: the subprime mortgage crisis. Hinko said most borrowers aren’t at fault for being unable to keep up with adjustable-rate mortgages, which begin with a lower interest rate that, within a certain period, jumps significantly, often to double-digits. The study found 46 percent of foreclosure cases in the first six months of 2007 involved such loans, up from 27 percent in 2005.
And while that is often enough to send a wage worker or senior citizen on a fixed income over the edge, mitigating factors — like divorce or a sudden downturn in health — are becoming increasingly relevant as homeowners stretch to find creative ways to afford that dream house and lenders seek new sources of revenue and profit.
What has happened is basically this: You get a mortgage from a certain bank or company, which then sells your mortgage to another investor, say Wells-Fargo or Deutsche Bank, two of the top five holders of foreclosed properties in Louisville (the latter does not have an office here). Say you got an ARM. If you’re like many borrowers, you weren’t given a schedule of increases — and if you’re like 14 of the 26 people profiled in the MHC study, taxes and insurance weren’t included in your mortgage payment, a loan structure that suggests imprudence on the part of the lender.
Not anticipating the rate change, you hit up your lender for some mercy. But they’ve already sold your loan under particular terms over which they no longer have control. You’re screwed. But the investor who owns your loan is screwed, too: Take the measure of this scenario’s wild rise in the United States over the last few years, and you could anticipate the subprime crisis.
“Wall Street wanted a higher return on their investment than they were getting,” Hinko said. “Within that, all kinds of prudent actions were lost.”
Ben Cook, CEO of the Kentucky Housing Corp., said last week that local lenders weren’t proffering the vast majority of bad loans — and the imprudence to which Hinko referred. However, he said his agency is ready to assist in helping reduce the number of court-ordered foreclosures.
Dana Jackson has worked with MHC on foreclosure issues for several years through her organization, Making Connections Louisville, which represents the Smoketown, Shelby Park, Phoenix Hill and California neighborhoods. Those areas have been susceptible to foreclosures in the past — in fact, California was near the top of the MHC study in foreclosures and had the highest percentage of ARMs.
Although urban neighborhoods appear to be moving temporarily to the backburner in the foreclosure discussion, Jackson said she’d work with MHC to offer assistance in any way she and her agency can.
Metro has allotted $350,000 this year to assist homeowners facing foreclosure. Mayor Jerry Abramson said during an interview last week that in the coming weeks, the city would introduce a new program to assist with foreclosures by providing education and facilitating communication between borrower and lender.
MHC is also advocating legislative changes that would establish more responsible lending practices.
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