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Our Barrios Disproportionately Affected - Can You Still Get Your Casita?
The mortgage crisis has been prominent in the news lately. Every week brings news of greater repercussions of the problem, from the personal tragedy of a foreclosed home, to esoteric computations of its effect on foreign currencies. As the finger-pointing continues, there is now criticism of too-lenient auditing of lending firms. Data shows that many Latino neighborhoods have been severely affected by the mortgage crisis. Could this have been avoided?
A number of friends and family in Latino neighborhoods in the greater New York area have become property owners in the past ten years. There were various push factors: the decline of rent control regulations, the continuing relative scarcity of housing in and around Manhattan, and the pull of skyrocketing appreciation of properties, often as much as a Lotto prize, in just a couple of years.
Some friends who were already property owners were persuaded to take out equity loans, backed by the exploding valuations of their humble little homes. There was a lot of excitement about replacing windows and siding, replacing the old minivan, or paying off the children’s wedding bills. They were not always prepared for the creeping variable interest rates, when those rates spiked.
Other friends were persuaded to refinance their existing mortgages at super low teaser rates (almost always at a higher total loan value). In many cases, people paid off old long-term fixed mortgages at moderate rates with graduated or variable interest balloon mortgages, as low as 3.45% in 2003 for a one-year adjustable rate mortgage (ARM). Everyone bet that real estate values would continue to rise, that interest rates would remain consistently low, and that there would be and endless supply of new buyers, spurred by no income verification and no money down offers.
As rates went back up to 5.6% in 2006 for those one-year ARMs, and the economy sagged under pressure from an expensive war and rising fuel prices, many households found themselves increasingly unable to make their payments. How could a couple of percentage points have such a huge impact? On a regular 30-year fixed rate mortgage, three percentage points may translate to several hundreds more on a monthly payment. But with the substandard and teaser loans, much had to do with the way graduated and balloon mortgages are structured; the monthly payment may be low in that first year, but very little of is applied to principal. The catch is that, after the honeymoon period, the rates may jump five or more percentage points, the gain in equity is almost nil, and the borrower may not be able to afford a costlier loan. Result: foreclosure rates in the Latino community have skyrocketed.
Many of the Latino homebuyers were first-time buyers, coming from apartment living, with only a vague idea of the real out-of-pocket costs of a private home – water, sewerage, taxes, insurance, planned and unplanned repairs, and the ever-volatile costs of indispensable utilities, i.e., gas and electricity. Similarly, many new property owners were unprepared for the closing costs on a home sale or refinancing. A nest egg of $30,000 would be halved after closing costs on a $300,000 property, leaving the buyer with just a five percent down payment, putting that borrower in a subprime loan market.
What about the particular role of mortgage brokers? In recent years, our informal sample of acquaintances cited decision-making based on hard-sell tactics from mortgage brokers: Why rent when you can buy? No down payment required! No income verification! Sea propietario! Be a property owner! Go ahead, buy into that American dream – picket fences, backyard barbecues, endless trips to Home Depot – who doesn’t want that?
We heard many stories of brokers who did not bother to explain what those closing costs in the Truth in Lending documentation really meant. Many times they offered to capitalize the closing costs, resulting in higher origination fees, payments, and commissions. Sometimes mortgage brokers call on friendly appraisers, improving the odds of getting approval on a possibly overvalued property. Other times, mortgage brokers have asked sellers to pick up the closing costs, just days before the scheduled closing. We heard stories of Latinos with platinum credit ratings being offered subprime loans, loans carrying higher rates of commission for brokers. We heard of real estate agents, mortgage brokers, attorneys and appraisers all referring new buyers to each other, without anyone taking responsibility for informing the purchasers of the perils of some of these decisions.
Recent administrations have deregulated many areas of the banking industry; it is not likely that they will explore a regulatory solution. So what can prospective homebuyers do? Save, save save! Having the cash for closing costs plus 20% of the purchase price will make a homebuyer eligible for the best loans. Work on having the best possible credit, and write the reporting agencies for a copy of one’s credit report. Most states require a free yearly report from each reporting agency, so that consumers may review their information. A careful scrutiny will reveal any errors; corrections and updates will have to be documented. Get comfortable with amortization tables and closing costs and procedures. Talk to property owners in the target area (not just those who are trying to sell you their property), find out what’s happening with taxes abd maintenance fees, or if major projects are in the works; talk to people you trust who have gone through the process, and ask for recommendations for attorneys and financing. Ask also about costs other than the purchase price of a property – taxes, insurance, maintenance or common charges, utilities, snow removal, reserves for likely repairs, and so on.
After all that homework is done, check out the flower flats and barbecue grills at the local home improvement store, and enjoy la casita!
(Sources: www.hotpads.com, www.bankrate.com, www.mortgage-x.com)
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