Home mortgage 'reset' shock to hit suburbs

The foreclosure crisis in Minnesota continues and is now poised to spread from cities to suburbs.

In large swaths of the Twin Cities and across the state, 40 percent of more than 50,000 subprime loans will jump to higher payments this year. Another 22 percent will reset after this year.

In Twin Cities suburbs, where home construction once boomed, hundreds of square miles are dotted with the homes of tens of thousands of subprime borrowers who will skid into higher monthly payments in 2008. Seventy-seven percent of such loans were taken out after 2004.

Older, urban neighborhoods have already seen a cascade of foreclosures in recent months. Declining interest rates could provide a respite for some, but the breather on higher payments may be short-lived.

"Foreclosure rates, certainly for 2008, will remain high and, in some places, at historical levels," said Michael Grover, an author of a new study published by the Federal Reserve Bank of Minneapolis. "We certainly are not out of the storm."

Indeed, by one measure, the study may understate potential economic troubles ahead for tens of thousands of Minnesota homeowners. The numbers in the Fed study, supplied by First American LoanPerformance, encompass most -- but not all -- subprime mortgages, note authors Grover and Andreas Lehnert, an economist with the Federal Reserve board of governors.

The figures include an estimated 70 percent of all Minnesota subprime mortgages and 95 percent of "Alt-A" mortgages -- home loans that didn't require proof of income, demanded little or no money down or were otherwise unconventional.

In the universe of subprime loans, only about 59 percent of subprime loans were current, as of October 2007, the Fed study found. Almost 87 percent of Alt-A loans were current.

"Some have spread rumors that the foreclosure crisis is on its last legs," said Brandon Nessen, executive director of Minnesota ACORN, a nonprofit organization that counsels financially troubled homeowners.

"From where we sit, the foreclosure crisis is going to continue through 2008 and into 2009," he said.

Falling rates help

To be sure, falling interest rates in the last several months should offer some help to subprime borrowers facing mortgage resets.

The average reset will bump up interest payments about a full percentage point, as of May 2008, compared with about 3.5 points at the same time a year earlier, Grover calculated.

Nevertheless, consumer advocates advising financially strapped homeowners note that resets are not a one- time event.

Many clients at Twin Cities Habitat for Humanity have seen their payments fall in their first reset in the last few months, said Cheryl Peterson, the group's program manager for mortgage foreclosure prevention.

"A couple of our clients said, 'My interest rate didn't go up, so I don't have to worry about it,'" Peterson said. But she said that's not so. "For the rest of the loan, it has the ability to go up as much as five points," she said.

Indeed, many adjustable-rate subprime loans change every six months. Some are altered every month, leaving homeowners vulnerable to rate increases in the months and years ahead.

Simply refinancing is not an option for many subprime borrowers, either because lenders have tightened lending standards or because the market value of their homes has fallen substantially in the last year or two.

That makes more foreclosures inevitable, in the view of experts. What's more, as the number of empty houses rises, the market value of homes -- and entire neighborhoods -- could fall.

"Often people describe a wave of foreclosures," Grover said. "Arguably, in parts of the Twin Cities, the wave already has gone through."

The number of scheduled subprime resets within the borders of Minneapolis and St. Paul, for instance, is overshadowed by subprime resets in the suburbs. But that may be because many urban subprime loans hit the rocks before monthly payments rose.

Food or mortgage

Sharon Young, a homeowner on the East Side of St. Paul, knows the dilemma all too well.

Young, 42, and her husband, Waverly, 46, were renters until they bought their first house three years ago. They bought an adjustable-rate mortgage that started with payments of $1,679 a month. In March 2007, the monthly payment was reset to $2,218.

The couple, with a combined gross income of $77,000, couldn't manage the $539 monthly increase. Young handles patient health claims for a local hospital. Her husband is a maintenance worker.

"Our mortgage company refused to negotiate," she said. The lender also wouldn't accept any payments less than the full monthly amount owed.

As a result, Sharon said she quit making payments a year ago and expects to lose her home to foreclosure this summer or fall. Paying for food, utilities and other expenses demanded much of the extra $539 a month the mortgage lender demanded.

"We rob Peter and Paul doesn't get paid," she said.

Refinancing is out of the question. Young and her husband bought the house for $250,000. A recent appraisal put its value at $170,000.

Young's assessment of home ownership: "It was a disaster."

Mike Meyers • 612-673-1746