Second mortgage-related shock could hit Minnesota

The home where Mai Pa and her husband Yer live in Brooklyn Park has new wood floors, stainless steel appliances and what's known as negative amortization.

That's when a homeowner makes less than the standard payment on a mortgage and the lender tacks the difference onto the principal.

"Probably looking back, I think that at the point when I bought this house, I probably was not qualified," said Pa. "So I was kind of given a loan just to get me into the house and everything."

Mai and her husband were working then, and have better jobs now. But the loan on the home they bought for $220,000 six years ago has ballooned to $250,000.

"With everybody who buys a house, you know, you sign 10,000 pieces of paper and you basically sign your whole life away," Pa said. "And it was just told to us that these were the different types of payments you could make. I think we really didn't understand about the negative amortizer, until a couple years down the road, like five years now, you look at the bill and it just shocks me."

And she's not alone. Even as the subprime mortgage crises is fading, there's a whole menagerie of other high-risk loans like Pa's still out there, with obscure names like Cash-Flow ARMs, Pay Option ARMs, and Pick a Payment Loans.

"The Alt-A crisis, to coin that term, is really about to begin."

Many, like Pa's, are Alt-A loans, once meant for credit-worthy borrowers who didn't have traditional paychecks, including entrepreneurs and the self-employed.

"These were people who were capable of paying their mortgages," said Mark Fleming, the chief economist for First American CoreLogic, one of the nation's biggest aggregators of mortgage information.

Fleming said Alt-A loans changed and grew to include many more, and riskier, homeowners.

The loans themselves changed, too. Many included some of the same risky terms as subprime mortgages, such as steeply rising interest rates and deferrable payments. Nationwide, more than three out of five Alt-A loans written in 2007 had these terms.

Now, experts fear the economic impact of rate adjustments and other changes coming to loans like Pa's.

"The Alt-A crisis ... is really about to begin," said Jane Bowman, an attorney with the Housing Preservation Project, a non-profit St. Paul law firm that helps homeowners who have fraudulent and illegal loans.

Bowman is trying to spread the word about the risks.

"And it's going to be different from the subprime market, because it's going to affect a lot of Greater Minnesota homeowners, as opposed to urban, Minneapolis and St. Paul homeowners," said Bowman.

She thinks a second mortgage crisis may also last longer.

"You've got homeowners who have not quite as bad of loans as the subprime, but they're not prime. And so these owners, the rates might not go up as drastically, and they might have a couple more resources to pay off the mortgage, so they may not default right away. But they will exhaust those resources, and then start defaulting," Bowman said.

It's hard to know the extent of the problem, because the loans and borrowers are different than in the subprime crisis.

In Minnesota, for instance, there are only about half as many adjustable rate Alt-A loans as there are similar subprime loans.

But Minnesota's Alt-A loans are about a third larger on average, and nearly twice as many are the most volatile interest-only loans. Many more are also secondary loans. That's according to end-of-year data for 2008 from the New York Federal Reserve Bank.

And while Alt-A loans are generally better quality, and the borrowers better off financially than with subprime mortgages, no one knows how they'll fare as unemployment grows and real estate values continue to plummet.

State and federal officials and even banks themselves are trying to cushion the fall this time.

Pa's lender, Countrywide, has rolled out financial education and hardship assistance programs.

In St. Paul, lawmakers are considering a host of new foreclosure measures this session. Some are drastic, such as expanding eminent domain to abandoned homes or using tax increment financing, usually used for commercial development, on foreclosed homes.

More likely though, is indirect help, by funding programs such as Community Action Partnership of Suburban Hennepin. Heather Posthumus does mortgage counseling there. She's working with Mai and Yer Pa, and her agency got notice of hundreds of other defaulting homeowners in recent weeks.

Many have lost jobs, and she said turning the economy around may be the only fix.

"And also lenders need to start giving more. They aren't coming up with realistic workouts," said Posthumus. "They're going to lose out any way you look at it. It's just how much do you want to lose out."

U.S. Rep. Keith Ellison, D-Minn., serves on the House Financial Services Committee. Ellison said Washington doesn't want a repeat of the subprime meltdown.

"I think the one thing we've learned is that simply folding our arms and turning our back on the crisis is no solution," said Ellison.

Ellison said he hopes the stimulus package will get people back to work and paying their mortgages. For those who can't, Congress may change bankruptcy laws to allow judges to rewrite loan terms.

Further resources and information:

• Fannie Mae -What to do if you're falling behind in your mortgage

• Searchable list of HUD-approved housing counseling agencies by state

• HUD foreclosure timeline

• Fannie Mae - Avoiding foreclosure scams

• Minnesote Home Ownership Center

• Glossary of foreclosure terms

• NeighborWorks America

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