By Jason Hancock

Micheal Thompson’s phone has been ringing off the hook for nearly three months, and on the other end are stories of individuals and families on the brink.

Some have lost their jobs, some have divorced, some have large medical expenses, some have lived beyond their means for years, but all have one thing in common: Thompson and his staff are a last resort.

“The hardships I’m hearing from people are just astounding,” he said. “They run the gamut from fraud to terrible life events.”

Thompson is the executive director of Iowa Mediation Services, the organization put in charge of operating Iowa Attorney General Tom Miller’s foreclosure hotline. Since it was established Sept. 12, more than 4,000 Iowans have called to try to get help to avoid losing their home. Those numbers, Miller said, are merely the tip of the iceberg.

“We are at the beginning of this foreclosure crisis, not in the middle, and certainly not at the end,” Miller said.

The numbers alone are staggering: In the second quarter of this year, nearly 15 percent of all subprime loans were delinquent and 5.52 percent were in foreclosure, according to the Mortgage Bankers Association. About 75 percent of subprime loans were adjustable rate mortgages (ARMs), and of those nearly 17 percent were delinquent and 8 percent were in foreclosure. Iowa was fourth in the country in subprime foreclosures at 9.2 percent.

Patrick Madigan, Iowa assistant attorney general, said many borrowers were set up to fail.

“It’s impossible to truly quantify, but we think fraud has been widespread,” he said. “It’s been a race to the bottom, where unethical actions have been rewarded with more customers. The idea was that ‘If I don’t do it, another company will make the loan.’”

Even absent outright fraud, the loose underwriting standards of the last several years have resulted in thousands of borrowers being put in unsuitable loans. Many like to point the finger at the borrowers and say they shouldn’t have gotten in over their heads, but Madigan said most believed the lender was operating ethically.

“People put their trust in some people that they shouldn’t have, and now they are in a bad situation,” he said. “This wasn’t a case of people being gullible or irresponsible.”

Thompson, who has been a professional mediator since 1975, said after hearing so many stories, he’s left to wonder why some of these loans were made in the first place.

“Why did anyone think this was going to work?” he said. “Some of these loans should have never been written.”

While subprime loans don’t always mean the recipient has poor credit, the majority go to borrowers who do not qualify for the best market interest rates because of their deficient credit history. These loans usually take the form of an ARM, where during the first few years there is an artificially low fixed interest rate. After the initial rate expires, the loan is free to adjust, usually every six months.

Because of the way these loans are structured, they almost always adjust upward, sometimes drastically, producing “payment shock,” Madigan said.

Madigan said the current market was built on the belief that gains in home prices would continue forever. Thus, loans were made with the idea that borrowers who experienced payment shock could come back and re-finance with the equity they had acquired. In the process, borrowers would be forced to pay origination fees and closing costs, which further strip homeowner equity.

“It was never intended that borrowers would be able to actually afford their loans,” Madigan said in a position paper he wrote entitled “Overview of the Subprime Foreclosure Crisis.”

Thompson said one of the biggest surprises he’s had since the foreclosure hotline started is the types of homes and homeowners that are in trouble.

“It’s a very diverse group,” he said. “I was shocked when the first batch of calls came in and the home values were $150,000 to $200,000. We’ve even gotten homes valued at $500,000. That’s still amazing to me. It’s not just about poor people.”

Room for optimism

David Horak understands how terrible it is to lose a home, especially when it is coupled with other life-altering events, such as illness or unemployment.

As president of the Iowa Mortgage Association, Horak also understands that the housing market is going through a rough patch, where many people have been hurt when the market bubble burst. But when you take a step back and look at the numbers, he said Iowa has managed far better than many other states.

“Iowa, as it relates to the national economy, is somewhat protected from the extremes,” he said.

It’s true, he said, that underwriting guidelines, or the rules lenders use to decide who should and should not get a loan, have allowed credit to be too readily available to customers who couldn’t handle it, but the problem is still relatively isolated.

“Nationally, 65 percent of homeowners have a mortgage,” he said, adding, “and 94 percent pay on time.”

Of the 6 percent that are delinquent, Horak said, 14 percent are subprime mortgages.

“What I’m trying to say is, this is still a small segment of homeowners,” he said. “For those going through it, it is a tragedy, but that is still a small portion of the market.”

Even the numbers that show Iowa as having the fourth highest subprime foreclosure rate in the country can be questioned.

“It’s all about which numbers you look at,” he said. “Iowa’s foreclosure process takes from nine to 14 months. Most other states’ process takes around 90 days. So our numbers seem higher because the period is longer.”

Horak said if you compare the number of foreclosures that are started each month on a state-by-state basis, Iowa actually ranks 33rd in the nation, according to the Mortgage Bankers Association.

“We’re at the bottom of the pack,” he said.

The industry is already in the process of fixing the problems that lead to the rise in foreclosures, Horak said, including tightening standards and doing away with some products that have proven too risky.

A recent example of this is Wells Fargo & Co., the second-largest U.S. mortgage lender, which said in July it would stop making subprime home loans. Last week, the company said it was setting aside $1.4 billion for home-equity loans it expects to go bad in 2008 and 2009, and that it was significantly scaling back home equity loans.

Life on the bubble

Brad Strasser, 45, said he and his family had to move out of their house and into an apartment to keep up with payments on an adjustable-rate loan he signed in 2005.

“I work two full-time jobs just to try to make ends meet,” he said. “But we still come up short every month.”

But this wasn’t even the beginning of his woes. In 2004, when he originally tried to refinance his mortgage, he discovered his property in northeast Des Moines had been over appraised and that most lenders wouldn’t even talk to him.

“Appraisal fraud is something we’ve seen more of in Iowa than anything else,” Madigan said. “People were told they could roll their debt into their mortgage, but then their home was appraised at too high a value.”

“This isn’t a matter of a flawed system,” Madigan said. “People in this situation were deceived, lied to.”

When interest rates for his loan went up from 9.5 percent to nearly 15 percent, and raised his monthly payment from $485 to $785, with the possibility that they could continue to rise to 21 percent before finally peaking, Strasser decided he would just sell the house and give whatever he could to get out of his mortgage. That’s when his family moved to an apartment, anticipating the loss of their home.

His family has since moved back into the home, but their future is still uncertain.

“We are now working with our servicer to get a loan modification agreement with them and a fixed rate we had originally been promised,” he said. “So far, that hasn’t happened. We still fear every day we will lose our home.”

Everyone’s problem

For every foreclosure within an eighth of a mile of a house — two-and-a-half city blocks in every direction — the value of those homes drops by about 1 percent.

The problems don’t stop there. Madigan said having more homes available due to foreclosure could have a depressing effect on the overall housing market.

“Plus, there have been a number of studies that show an increase in crime when there is an increase in foreclosures and vacant properties,” he said.

Fighting those problems off, stabilizing the community and redeveloping blighted areas are a challenge for cash-starved municipalities, especially when they have less money to pay for it, since foreclosures cause tax collections to suffer. Not only do foreclosures take properties off the tax rolls, but the remaining homeowners often want their assessments lowered and taxes cut to reflect their plummeting property values.

“That makes this a public policy issue,” Madigan said. “And we fear it’s only going to get worse.”

Miller said the idea for the foreclosure hotline came from thinking back to the farm crisis of the 1980s.

“There are real similarities,” he said. “At that time there was a mediation effort established that saved a huge number of farms. We know we won’t be able to save every home, but I think we can save a lot.”

Another aspect of Miller’s efforts is discussion with the servicer of the loans, which are the companies that accept payment and manage mortgages.

“We’ve found there is a major lack of contact between the borrower and the servicer,” he said. “In 50 percent of foreclosures, there was no contact whatsoever.”

Looking for solutions

Iowa Mediation Services are looking for more staff to handle the deluge of phone calls they’ve been receiving.

“You have to take the time to listen to their story,” Thompson said. “You can’t do this quick and dirty.”

Thompson estimates that for every call that comes in, his staff averages about 10 minutes on the phone working with them. That equates to 40,000 minutes so far for a staff of only six full-time, four part-time and three contract employees.

“We’re working on raising funds to do this right,” he said. “When we went into this, we thought getting 100 calls a month would be significant. We had no idea we would be this busy.”

Thompson and his staff work to get an accurate picture of the borrower’s situation and try to connect them with the servicer of their loan to try to get modifications that will allow the homeowner to keep their home. They may also refer the caller to a housing counselor.

“We try to find ways to address the hardships,” Thompson said. “But even with all the help in the world, 10 to 15 percent will still lose their house.”

Subprime lenders estimate that they lose an average of $50,000 on every foreclosure, Madigan said. So the Attorneys General of several states are working with lenders and loan servicers to try to find “win-win situations for everyone involved.”

“The lender avoids huge monetary losses, and the borrower gets to keep their home,” he said “There is no across-the-board solution, so it has to be handled on a case-by-case basis.”

However, Miller said, the currently historic subprime delinquency rates are before most ARMs have reset to a higher payment, expected early next spring.

“That’s when we will start to see the worst of it,” he said. “We expect it to peak next year, maybe later. That’s why we are working so hard to get the hotline up and implemented. We want to lay the groundwork now for the upcoming surge.”

Iowans facing a mortgage foreclosure can call (877) 622-4866 (toll-free) to reach the Iowa Mediation Service, which will take information from borrowers and then explore if a loan modification might work for both the borrower and lender. CV

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