1% mortgage - from joy to time bomb
A disabled man on a fixed income risks losing his home over his adjustable rate mortgage.
By JACOB H. FRIES
Published June 20, 2007
ST. PETERSBURG -- The official-looking notice appeared in his mailbox last year. To Denith Harrigan, the promise of an interest rate as low as 1 percent was too good to ignore.
Disabled and on a fixed income of $2,100 a month, Harrigan could finally pay off credit card debts and fix his leaky pool. What a deal.
Or so he thought.
Now just a few months into his new mortgage, Harrigan is in serious risk of losing his house. In less than three years, his payment could grow to equal his total income.
"I got into something I had no intention of getting involved in," said Harrigan, 36, who lives alone in a ranch-style house in Lakewood Estates. "I believe this should be against the law."
Harrigan is among a growing number of home buyers who, knowingly or not, have taken out adjustable rate mortgages known as ARMs, often lured by introductory offers that they didn't fully understand. Industry insiders say both sides share blame: the consumers who want to believe the sales pitch and those brokers and lenders who snare uninformed customers in search of bigger-than-normal commissions.
On Tuesday, Gov. Charlie Crist signed into law a bill requiring brokers and lenders to explain better the risks of such loans.
"Ninety percent of mortgage brokers are hard-working, committed people. But sadly, there are a few that have sold mortgages to families who are totally unaware of the consequences of an adjustable rate mortgage," said Sen. Mike Fasano, R-New Port Richey, one of the bill's sponsors. "I've heard some horror stories."
The popularity of ARMs, experts say, is contributing to the surge of foreclosures in Florida and other states.
In May, the Sunshine State led the country with nearly 30,000 homes entering the foreclosure process, according to data assembled by Bargain.com, of Goleta, Calif. And while 35 states saw a decline in new foreclosures last month, Florida's rose 22 percent.
"Foreclosures are only going to increase when you have more of these loans resetting to their higher rates," said Ira Rheingold, executive director of the Washington-based National Association of Consumer Advocates.
Option ARMs, like Harrigan's, give buyers the choice each month of paying interest and principal, interest only or an amount less than the actual interest. But if the home buyer picks the minimum payment -- as most do -- their mortgage debt grows.
For Harrigan, the lower interest rate initially decreased his mortgage payment from $1,495 to $1,005. But if he covers only the minimum payment, his principal will grow by about $1,000 a month, and in less than three years his payment will equal his total income.
"There are so many people underwater right now," Rheingold said. "How are people going to refinance or sell when their mortgage is worth more than the house?"
Complaints from buyers like Harrigan, who say they were misled about their loans, have grabbed the attention of government. In September, federal regulators advised banks to improve explanations of nontraditional mortgages and assess a borrower's ability to pay the fully adjusted payment -- not just the teaser interest rate.
Consumer advocates say disclosure requirements, like those Crist signed into law Tuesday, are good but won't do nearly enough to rein in abuse. Lenders can easily bury the facts in an avalanche of paper or whitewash them in their sales pitches.
"People don't stand a chance," Rheingold said. "When I refinanced, I didn't understand it all and I know this stuff. ... Yes, some consumers may have understood the loan, but the majority of people are getting screwed royally. It's a myth to say consumers are choosing these mortgages."
Brokers and lenders alike are quick to point out that option ARMs fill a need. For investors, borrowers with fluctuating incomes or people with a lot of home equity and an immediate need for extra cash, the mortgages work.
"It's a pay-now-or-pay-later situation, and ultimately it's always the customer's decision which is best for them," said Patrice Yamato, president of the Florida Association of Mortgage Brokers.
Yamato acknowledged that people have misused option ARMs and some brokers and lenders have outright lied that the low interest rates were fixed.
"As with everything, there are tendencies to have abuse with these," she said. "I also think that some consumers are being misled by people who may not understand the product themselves."
As for Harrigan, he was probably better informed than most: He earned a real estate license in 2003 and has studied accounting. Yet, looking over his house, he knows he may lose it.
"I was under the assumption everyone was as honest as I am," he said recently. "I'm not a fool. If I had known ... I would have said, 'Thank you, but no thank you!'"
After closing, Harrigan said he had second thoughts and tried to back out during the three-day grace period. But the broker with Premier Mortgage Funding encouraged him to take advantage of the low rate for a couple of years, then refinance, Harrigan said.
The broker, Harrigan said, didn't mention the stiff prepayment penalty or make clear that he could pay the minimum for only so long before triggering a monthly payment of more than $2,000 -- leaving him only about $100 to live on.
By law, Premier didn't have to ensure that Harrigan had the income or financial means to pay the higher rate.
While Harrigan regrets getting the mortgage, Premier Mortgage Funding says it was a good deal. Harrigan was able to pay off $12,000 in credit card debts and got an extra $6,000 in cash.
"I see a huge improvement for this gentleman," said Peter Forcey, sales manager of the Independence, Ohio, branch that sold the mortgage. "It looks like a pretty strong loan."
Forcey said Premier often directs customers to less risky mortgages, but added that consumers need to take some responsibility for their decisions.
"We pride ourselves on the level of disclosure," he said. "There has to be a benefit for the client or it's gone."
Forcey acknowledged one error in the deal. In the mortgage paperwork, Harrigan was listed as being white when, in fact, he is black. Federal regulators ask for this information to prevent discrimination.
"I'm guessing he just made a mistake," Forcey said of the broker, who has since left Premier.
Harrigan hasn't given up. He's used to proving people wrong. After a motorcycle accident in 1993, he was left with some physical disabilities and a speech impediment, but was determined to show he could do anything he wanted.
"Don't tell me I can't do something," he said.
After getting his first mortgage statement in January, Harrigan showed it to friends who work in the real estate and lending business. They are trying to help, but they don't know how to save his house. His income is limited and with housing prices stalling, his buildup of equity has slowed.
Harrigan shakes his head and smiles. A devout Christian, he has faith God will watch over him.
"I know it's going to be okay," he said. "Hopefully, people can benefit from what I'm going through."
Times news researcher Caryn Baird contributed to this report.
Fast facts: Don't be a victim
Tips to avoid mortgage problems:
- Review the terms of the mortgage to be sure you understand them. How long will the initial interest rate last? How frequently could it change? How high could it go? If you have payment options, how do they work? Could you end up owing more than you do now? Is there a prepayment penalty?
- Don't go negative. If you have an option ARM (an adjustable mortgage that can offer payments lower than interest-only) and always make the minimum payment, your mortgage balance will grow each month and eventually trigger higher payments. The remedy: Make extra large payments one or more times per year. That way you can pay down some or all of the interest that's been added to your balance.
- Consider refinancing. If you're planning to stay in your home for at least a few more years, refinancing with a fixed-rate mortgage is a winning idea. You can lock in relatively low rates.
New state law
It requires brokers and lenders to provide borrowers with detailed disclosures for variable rate loans.
They must also give customers the Consumer Handbook on Adjustable Rate Mortgages, which explains variable rate loans and cautions consumers about the risks of these loans.
It also empowers the state Office of Financial Regulation to pursue action against mortgage brokers and lenders who violate the federal Real Estate Settlement Procedures Act or the federal Truth-in-Lending Act.