News - Local News

POSTED: Monday, Dec. 01, 2008

Bellingham man's adjustable mortgage became money trap

Like millions of his fellow Americans, Francisco Caceres of Bellingham took advantage of an adjustable rate mortgage to help him buy a house with a monthly payment he could afford.

Caceres said he got his first adjustable mortgage seven years ago and managed to refinance it twice since then, to get out from under the higher interest rates and payments that could kick in after the introductory period. In a market of rising home prices, increased home equity made refinancing relatively easy.

Then came the collapse. Housing prices faltered. Some mortgage companies, especially those that specialized in adjustables, closed up shop as loans began to go bad. That included two of the companies that had made loans to Caceres: Long Beach Mortgage Co. and Fremont General Corp.

About a year ago, Caceres saw his $1,200-a-month payment adjust to $1,900. Six month later, it was $2,280. And his catering business was a lot less brisk as his customers cut their expenses.

Caceres knew he couldn't afford that $2,280 a month for long. He hoped to refinance into a fixed-rate mortgage, but in the new credit environment he found that lenders didn't want his business, even on another adjustable. Foreclosure loomed.

But Caceres didn't panic, he didn't walk away from his home, and he didn't bite when he got a call from some kind of "facilitating company" offering to help him in exchange for a $1,800 fee.

Instead, he contacted the loan servicing company to explain his plight.

He didn't get instant results. In fact, it took five months of correspondence with the servicer, and a couple of missed payments, but he eventually got a loan modification that set his payments at an affordable $1,690 a month for the next two years. At the end of that time, Caceres hopes he'll find it easier to refinance one more time, or else sell the home he shares with his wife and three children.

"This is a Band-Aid," he said.

Caceres' experience demonstrates that mortgage lenders are willing to work with borrowers to avoid foreclosures that hurt both parties - especially at a time when widespread loan defaults nationwide are threatening to overwhelm the financial system. Both FannieMae and FreddieMac, the mortgage giants that purchase loans made by other lenders, have announced plans to help distressed borrowers avoid foreclosure. The Federal Deposit Insurance Corp. is also trying to work with homeowners whose mortgages have become federal property after the collapse of federally insured banks like IndyMac.

Kristi Coy, senior sales associate at RE/Max Whatcom County Inc., urges homeowners to do everything they can to avoid a foreclosure. She said it's a big mistake to walk away from a home and assume nothing can be done.

Step one, Coy said, is to call the lender or loan servicer to ask for new terms.

"A lot of times they will work with the homeowner," Coy said. "I absolutely am seeing situations where the banks are doing a lot more to keep from foreclosing."

Lenders may agree to lower interest rates, add missed payments to the back end of a loan or agree to lower payments for a year or two to get a borrower over a rough spot.

In other cases, banks may agree to a "short sale," in which the home is sold for less than the outstanding loan. The bank takes a loss but avoids having ownership of a house, while the borrower avoids the stigma of foreclosure.

That stigma is real, Coy said. While a short sale also hurts a consumer's credit rating, a foreclosure may make it difficult to get so much as a car loan for a number of years, and the consequences of a foreclosure are likely to worsen as lenders continue to tighten standards.

Caceres is poorer but wiser for his own experience. And he thinks reforms are needed to keep lenders from taking advantage of people.

"The whole system from the top to the bottom needs to be fixed," he said. "People are being greedy, trying to make money off something that should be a secure haven for families."