By Sandra Guy
Thursday, March 5, 2009
Rising fears of sub-prime mortgage defaults spooked the financial markets last week. One woman's story and recent studies show how women are disproportionately vulnerable to this financial liability. Advisors recommend pre-mortgage counseling.
(WOMENSENEWS)--U.S. financial markets were rocked last week by worries about the soundness of the "sub-prime"--or higher risk--mortgage market.
Doris Douglas can tell you from personal experience what the jitters are about. The 55-year-old mother of three grown children signed her first mortgage without reading the fine print seven years ago.
"I thought it was a 30-year mortgage," said Douglas, whose house is near Chattanooga, Tenn., in the Appalachians.
Based on a less-than-perfect credit score at the time she negotiated her mortgage, Douglas was paying an 11.95 percent interest rate on her mortgage and she wanted to lower it.
But late last year--when she tried to refinance her mortgage and get a lower interest rate--she learned that she had actually signed a 10-year mortgage.
What Douglas had signed is known as a "balloon" mortgage, so called because the final payment, compared to the regular monthly payments, is significantly larger, or "inflated." So instead of continuing to make monthly payments of $692.01 for the next 20 years, Douglas was suddenly faced with the fact that she was expected to pay the entire $80,000 balance on her principal in one payment in early 2007.
Douglas was fortunate to be able to negotiate a new mortgage.
She is also fortunate to be part of a new and often positive trend in women's home ownership, especially for women in her age group.
Single women made up 22 percent of the nation's home buyers in 2006, the latest data available, compared with 14 percent in 1995, according to the Washington-based National Association of Realtors.
The ability to own homes is especially important for female baby boomers, those who, like Douglas, are born between 1946 and 1964 and half of whom do not have access to pensions or other retirement plans. Those who can tap into their home equity will be at an economic advantage to their peers who rent, according to a February 2007 study by the Harvard Generations Policy Program, the Harvard Generations Policy Journal and the Global Generations Policy Institute.
But as more women step into home-buying a disproportionate number are tripping on predatory lending practices in a sub-prime market that set a three-and-a-half-year high in delinquencies in the third quarter of 2006, reaching 12.56 percent of the loans outstanding, according to data from the Mortgage Bankers Association, a Washington-based industry group.
Douglas' balloon mortgage is not usually recommended for homebuyers planning to live in their homes for a long time. They are more for speculators who buy a house and resell it quickly at a profit, using the proceeds of the sale to pay off the mortgage before the big payment comes due.
However, predatory lenders--those who don't properly explain a mortgage to borrowers, don't try to match a borrower with an appropriate type of mortgage, or who charge excessive fees--often "sell" borrowers like Douglas on the balloon mortgage by emphasizing the affordability of the monthly payment and lower "fixed " interest rate. Unlike 30 years ago--when there were only a very few types of mortgages to choose from--a homebuyer today faces a dizzying array of more than 200 distinctive mortgage products.
All this variety and flexibility breeds complexity. Mortgages have become increasingly specialized and more specific in their terms, which means the number of caveats typically increase, giving the borrower more individual items to understand, and remember. Predatory lenders emphasize the positive aspects of a product and minimize the negatives. The clauses may not be "hidden," but they aren't always fully disclosed.
This had led to a disproportionate number of women unwittingly and inappropriately taking out sub-prime loans, which lenders usually market to high-risk borrowers whose credit scores are lower than 660.
Last December the Consumer Federation of America, a Washington-based consumer research and advocacy group, released a study finding that nearly one-third (32 percent) of female borrowers receive sub-prime mortgage loans of all types, compared with about a quarter of male borrowers.
Women with higher incomes and women of color reflect the extremes of the disparity. Women earning double the median income of the area where they live were 46 percent more likely to receive sub-prime mortgages than men with similar incomes.
Women of color were the most likely to receive sub-prime loans at every income level. For example, upper-income African American women were nearly five times more likely to receive sub-prime mortgages than upper-income white men, the study showed.
Upper-income Latinas were nearly four times more likely to receive sub-prime loans than upper-income white men.
The term "upper income" applied to those who earned twice the median income of the metropolitan statistical area in which the person lived. The study examined 4.4 million mortgage originations nationwide, focused on sub-prime loans and was based on 2005 mortgage lending reports required by the federal Home Mortgage Disclosure Act.
"The high levels of sub-prime lending among women compromise their ability to accrue equity by paying off their mortgage, one of the easiest and most effective pathways to building wealth in America," said Nancy Register, associate director of the Consumer Federation of America and national director of America Saves, a social marketing campaign by the federation to encourage lower- and moderate-income households to save and build wealth.
In Douglas' case, her mortgage was considered sub-prime because of her higher risk of defaulting on the loan based on her credit profile at the time she took out the mortgage.
When Douglas realized that she had to get a new mortgage or face defaulting on the final payment, she turned to someone she knew at the Housing Development Corporation of the Clinch Valley, a local affordable housing organization affiliated with Neighbor Works America, a Washington-based national network of community development and affordable housing organizations.
The organization, which provides housing counseling services, homebuyer education and affordable mortgages to first-time buyers, helped Douglas obtain a 30-year fixed mortgage with a 7.375 percent interest rate. Her new mortgage payment is $583.88, just over $108 cheaper than her previous balloon mortgage.
Now, Douglas warns anyone who is offered a balloon mortgage to "run away as fast as you can."
"I was clueless about buying a house," said Douglas. "I was the perfect candidate for this kind of thing."
Ken Wade, CEO of NeighborWorks America, says prospective homebuyers should get counseling from a certified housing counseling agency before taking out a mortgage in this complicated marketplace.
"It's a powerful wealth-creating tool," Wade said, referring to home ownership. "Women who are successful at owning a home will be that much more self-sufficient."
Sandra Guy, a 23-year veteran journalist, is a business reporter at the Chicago Sun-Times. She has covered business, politics, education, technology and peace issues, and served as a former president of the Chicago chapter of the Association for Women Journalists.