Credit counselors overwhelmed by U.S. mortgage crisis

By Andrea Hopkins Thu Mar 22, 8:26 AM ET

Until last year, financial counselors at the Home Ownership Center of Greater Cincinnati spent most of their time teaching Americans how to buy a first home. Now, they're deluged by broken and bereft homeowners facing foreclosure.

"Oh Lord, there is no way we can keep up with these calls," said Kaye Britton, a foreclosure counselor at the downtown nonprofit group that promotes home ownership to minority Americans, among others.

Britton has been helping clients reach the American dream of owning a home since 2002. Handmade wall signs urge would-be buyers to "sweat the small stuff" and note the lender's golden rule: "They have the gold, they make the rules."

Foreclosures were formerly rare, caused mostly by the loss of job, divorce or medical bills.

But when rising interest rates began driving up mortgage payments last year, homeowners started to feel the pain. Phones at credit counselors across the country are now ringing off the hook.

The industrial heartland has been particularly hard-hit. Ohio had the highest number of home foreclosures in 2006, while neighboring Michigan and Indiana -- all sideswiped by the faltering U.S. auto industry -- were close behind.

Housing analysts predict between 1 million and 3 million U.S. homes will be foreclosed upon in 2007. Already a wave of defaults on subprime mortgages held by those with poor credit have caused a crisis in parts of the industry, and some economists believe a recession could result.

"We knew it was going to be bad, but we didn't think it would be this bad," said Britton, echoing many who warned that increasingly exotic mortgage programs -- including those that required no down payment on home purchases -- would come back to haunt home buyers.

PREDATORY LENDING

Subprime loans allowed many Americans with spotty credit to buy into the housing boom, driving home ownership to nearly 69 percent nationwide in 2006, up from 65.4 percent a decade earlier. But teaser rates that kept interest payments low for two or three years have begun to expire, driving monthly payments through the roof.

Shanna Smith, chief executive of the National Fair Housing Alliance, said lenders often targeted the most vulnerable borrowers for subprime loans, even if they were eligible for loans with lower rates. More often than not, the borrowers had little understanding of mortgages.

"All the predatory lending that has gone on, all of the pushing of exotic loans on people of color, female-headed households, families with children, people with disabilities -- it's all coming home to roost," Smith said.

Britton said borrowers and lenders share the blame for the crisis. She sees many borrowers who simply didn't understand their interest rate was only fixed for two or three years, then could rise along with market rates.

"That's all they hear -- that it's fixed, not that it's only fixed for the first two years," Britton said. "They don't know their payment's gone up until they get the notice in the mail. And then they don't have the money."

Not all of the problem is in the subprime market. Many Americans with good credit but low income or no savings signed up for adjustable rate mortgages or interest-only loans to get into the market. As rates rise, they too feel the pinch.

At the nonprofit Consumer Credit Counseling Service in suburban Cincinnati, counselor Darcy Blankenship sees a steady stream of people who knew their payments would be going up, but signed the loan anyway because they just wanted a house.

"People are so excited about wanting that house, they don't look at the whole picture. They just want the keys," she said.

CREDIT COUNSELING

Demand for counseling appointments at CCCS's Cincinnati offices has risen 87 percent from a year earlier.

Blankenship said one client started out with a 3.9 percent interest rate on his 30-year mortgage. Now it's rising to 11 percent -- and he can't meet the higher payments because once he bought the home he piled up debt furnishing the home.

"Now he can't refinance either, because of the debt. He just said, 'There's no way,"' she recalled.

Once borrowers fall 90 days behind on payments, lenders can start the foreclosure process, which can take up to a year. Owners can try to sell the house, but with prices falling and foreclosed homes flooding the market, borrowers often end up still owing more than they can get for the house.

Britton said people should call a reputable credit counselor as soon as they're in trouble. Loans can be restructured, and emergency funding may be available. But she admits the counseling industry is already overwhelmed.

"If I stop answering calls to actually talk to a client and help them, the messages pile up, and there's no time to call them all back," Britton said. "It's only going to get worse."