Rural Iowa poised for hit from foreclosure problems
The number of adjustable-rate mortgages that will reset to higher interest rates will peak this summer and fall, increasing the cost of homeownership for millions of borrowers nationally and in Iowa.
It's unclear how many of those homeowners will qualify for and be helped by industry and government plans to ease the foreclosure crisis.
Even the federal government and Bush administration's plans to freeze subprime interest rates and temporarily stop foreclosure proceedings have been criticized as being limited to too few borrowers. Local homeowner advocates say some people are simply in too deep to get back on their feet without losing their house, filing for bankruptcy or both.
The Register's analysis found that the impact could be more acute in rural areas, where borrowers have been more likely than their urban counterparts to receive higher-interest loans.
Iowa State University economist David Swenson said thus far the state's growing foreclosure problem is not a statewide crisis, but it is creating "pockets of stress" across the state. Foreclosures affect the larger economy as home values fall, and people lose equity and have less money to spend, he said. Actions by local companies invested in these home loans also reverberate through the economy.
"It's going to constrain their potential for growth in the future," Swenson said.
And even a few foreclosures can have a huge impact on a small town, said John Baker, an attorney with Iowa Concern, a hot line for financial and legal assistance for Iowans. "The value of every property in the town drops dramatically," he said. Vacant houses deteriorate, "and it has a cascading effect."
Other problems, such as divorce or addictions, are likely to rise, Baker said.
The Register found that communities with the highest percentage of high-interest loans are scattered across the state:
- Greene County in central Iowa has the highest proportion of high-interest loans in the state, based on lending data from 2004 to 2006. More than half of the homeowners who took out mortgages in those three years - about 400 - have high-interest loans.
- The problem is even more evident at the local level: In Charles City, which has just 2,100 single-family homes, 66 out of 97 borrowers from 2004 to 2006 had higher-interest loans.
- Statewide, about 27 percent of rural loans, compared with 19 percent of urban loans, in Iowa had higher interest rates during the same period, the Register found.
Loans with higher interest rates are often tied to subprime, adjustable-rate mortgages. While a majority of subprime loans are paid off successfully, they have the highest percentage of foreclosures.
Subprime, adjustable-rate loans drive the nation's mortgage crisis, which has been pushing the economy toward recession.
Millions of homeowners have lost their homes. Investors, banks and even big mortgage companies like Wells Fargo and Countrywide have taken a hit, and some smaller lenders have shut down altogether.
About 12.4 percent of subprime, adjustable-rate mortgages were in foreclosure in Iowa at the end of last year, according to data from a private firm that tracks the lending industry, First American CoreLogic, LoanPerformance.
Fewer than 1 percent of regular, or prime, ARM loans and about 4 percent of fixed-rate subprime loans in Iowa are in foreclosure.
Why rural Iowans get more risky loans
Lenders, brokers and borrower advocates say there are a range of reasons why rural borrowers tend to get stuck with higher-interest rates:
- The rural borrowers who took out loans in Iowa from 2004 through 2006 had an average income of $56,000, compared with $66,000 for urban borrowers. Even though houses cost less in rural areas, lenders may see lower incomes as higher risk and give them higher rates.
- Appraisers have a harder time valuing homes in rural areas and small towns where few homes sell and sales are far apart. Homes also sometimes swing in value from an initial loan to refinancing, which can affect interest rates and payments, and can leave borrowers owing more on their loan than their home is worth.
- Some rural and small-town borrowers are less likely to shop around, and fewer local lenders sometimes means there are less-competitive rates.
- Even big lenders, easily accessed by phone or Internet, raise the interest rates on rural, inexpensive homes to cover their costs and make their profit.
Joel Rogers, president of the Iowa Association of Mortgage Brokers, said smaller loan amounts in rural areas prompt lenders to charge higher interest rates.
"The originator makes money on the size of the loan. On a $100,000 loan you can make twice as much money as on a $50,000, so you can offer lower rates on higher loan amounts," he said.
- Some small banks don't have the financial resources to offer lower-interest, fixed-rate loans.
Peoples Trust & Savings Bank, which has eight locations in central Iowa, originated the largest number of higher-interest-rate loans in Greene County, about 50 miles northwest of Des Moines.
Roger Nailor, market president for the bank's Scranton branch, said his bank lacks the same access to cheaper government-backed funds that larger banks use to offer lower rates.
"When you get a bigger bank, they can buy those funds in huge blocks," he said. "It's capitalism at its greatest, and the bigger guy gets a better deal."
His bank funds loans with deposits and tends to hold on to them, instead of selling them to investors. Banks that do that tend to favor adjustable-rate mortgages because if the interest rate on the deposit falls, they need to raise the rate on the loan to avoid losing money, he said.
As a result, "we're a little higher interest rate," he said, adding that his bank usually charges less in fees to help make up the difference.
One family's struggle with an adjustable loan
Rural borrowers are also subject to the same deception and fraud as urban borrowers, such as inflated appraisals or hidden loan costs.
Mike Ross and his wife, Terri, refinanced their $60,000 two-story house in Grand Junction, a 900-person town in Greene County, four years ago.
Refinancing allowed them to remove Terri's father's name from the original loan, as well as borrow $25,000 from their equity to remodel their small, 1950s-era kitchen and dining room.
Ross said he agreed to a 7.2 percent fixed rate over the phone with an Urbandale broker. But he said the broker pushed him into an adjustable rate when they closed on the loan, and promised it would only adjust by a half a percentage point every six months.
When the loan adjusted on Dec. 1, 2006, the rate jumped to about 10.2 percent and kept climbing. His payments went from about $430 to $650, and he couldn't keep up.
The lender, Nationstar Mortgage, a subprime lender in Texas, temporarily lowered the rate to 8.2 percent to give the Rosses a chance to catch up, but the rate was set to go back to 11.9 percent in May.
"I'd like to pay the house off. All they have to do is work with me," Ross said. "If they leave the rate where it is, I can afford the monthly payment."
Nationstar officials told a Register reporter they were unaware the Rosses needed help beyond the temporary adjustment. After the newspaper inquired about the Rosses' loan, the company agreed to give them an 8.29 percent fixed rate.
Ron Fountain, Nationstar vice president and associate general counsel, said he's heard similar stories of borrowers whose brokers put them into loans they couldn't afford. Nationstar has since stopped offering loans through brokers and now originates all loans in-house, he said.
He said the company would do everything it could to keep the Rosses in their house.
"Hopefully this will make their life a little less stressful," he said.
High-risk loans tied to Iowans refinancing
Rural families like the Rosses, who refinanced existing home loans, are of particular concern to groups trying to help cash-strapped borrowers.
One-third of all rural borrowers in Iowa who refinanced from 2004 through 2006 ended up with higher-interest loans, compared with one-fourth of borrowers in urban areas, the Register found.
In 2006, refinancing or home-improvement loans in Iowa accounted for about 66 percent of the higher-interest mortgages. Nationally, those types of loans made up 54 percent of all higher-interest mortgages.
"There's a myth out there that this problem was caused by people buying more house than they could afford," said Iowa Assistant Attorney General Patrick Madigan. "When you look at subprime loans, you have to recognize that the majority of subprime loans are refinancing. It's people who have owned their homes for a while and they got into trouble with credit cards, or whatever, and they did a debt-consolidation refi."
About 70 percent of the complaints that come into the state's foreclosure hot line for people struggling to pay their mortgages are from borrowers who refinanced, according to Iowa Mediation Service, which operates the hotline in conjunction with the attorney general's office. More than 5,000 people have called the hotline since September. Workers have turned about 500 of those calls into actual cases.
"What I was struck by ... was how many little towns have more than one complaint," said Iowa Mediation Service director Mike Thompson. "This is not just an urban phenomenon. I think you're going to see a lot of rural people with the same problems."
About half of all complaints came from rural areas, he said, even though statistics show more than twice as many loans exist in urban areas.
Strong farm economy not a benefit to all
While high corn prices and other factors help some small towns, not every community or borrower shares in that prosperity, said Baker, the attorney with Iowa Concern, a program of Iowa State University Extension.
"How many of these towns have empty storefronts? There are huge gaps in income between people. Other sectors are doing really poorly," he said.
The Ross family typifies the tight budgets many rural households face.
Mike Ross, 45, is an over-the-road truck driver and his wife works part time at a seed company. Together, they bring home about $2,300 a month after taxes.
Their current house payment, car payment, utilities, groceries, cell phone and prescriptions total about $2,000 a month. They're paying about $50 a month on one credit card with a $700 limit.
They owe about $10,000 in medical bills and can't afford health insurance for themselves or their 11-year-old son. Good-paying jobs, especially those with benefits, are scarce in their town, they said. There was no room to pay a couple hundred dollars more on their house payment.
"And good luck trying to sell it," Mike Ross said.
Baker, the attorney with the Iowa Concern hot line, foresees rural and small-town families facing similar problems today as they did during Iowa's farm crisis.
"It's going to be just like it was in the '80s," he said. "You'll see divorce, child custody battles, bankruptcy, abuse of all forms - drug abuse, alcohol abuse."
But today's homeowners have even less of a safety net in some ways than rural Iowans two decades ago, he said.
"The big difference between this and the '80s was when an acre of farmland dropped in value you could still produce income off it," he said. "Houses don't produce income."
Reporter Paula Lavigne can be reached at (515) 745-3428 or plavigne@dmreg.com
