Kansas ranks high on home foreclosures – Capital Journal

Kansas ranks high on home foreclosures

Locked out on home life
More and more Kansans face foreclosure; subprime mortgages sometimes faulted
By Michael Hooper
The Capital-Journal
Published Sunday, April 29, 2007

Welcome to the neighborhood. Don’t forget to cut your grass, wave to the neighbors and, of course, pay the mortgage.

Pretty simple, right?

Not for thousands of Kansans who are finding the American dream of home ownership increasingly difficult to achieve.

As recently as December, there were 4,220 homes in foreclosure across the state, and another 7,385 home loans were seriously delinquent, meaning more than 90 days in arrears, said John Santner, district director with NeighborWorks America, a Neighborhood Reinvestment Corp. based in Kansas City, Mo.

Kansas is experiencing foreclosure rates higher than the national average for virtually all types of mortgages, he said. A total of 1.32 percent of all mortgages were in foreclosure in Kansas in late 2006, higher than the 1.19 percent elsewhere in the United States.

Robert Baker, counselor and education coordinator with Housing and Credit Counseling, said Kansans are strapped with credit card debts, reduced income, job losses and medical hardships. Homeowners are struggling to pay higher monthly payments on mortgages with interest rates that climb in the second and third year of the loans. And Americans have little savings.

The U.S. Commerce Department’s Bureau of Economic Analysis said Americans spent more than they earned in 2005 — creating a negative savings rate of 0.5 percent for the year.

“The middle class is getting squeezed,” Baker said. “They’ve become accustomed to a lifestyle that they can no longer afford.”

Subprime mortgages

While the foreclosure rate has historically hovered at about 1 percent of all outstanding loans, the nation is witnessing a dramatic growth in the foreclosure rate for subprime loans and “exotic mortgages,” Santner said.

Mortgage brokers offer subprime adjustable rate mortgages to buyers with poor credit. The interest rate is inexpensive on the front end. But the interest rate climbs in the second or third year, increasing monthly payments by up to 30 percent, Santner said. Such loans are often tied to the prime rate — currently at 8.25 percent. Sometimes the loan will increase to 2 or 3 points over prime — making the interest rate as much as 10.2 percent to 11.2 percent.

“This escalator clause is rarely explained to anyone,” said Steve Hermes, management consultant for communications and public affairs for NeighborWorks America, Kansas City, Mo.

A recent study by the Center for Responsible Lending suggests almost 20 percent of Kansas’ subprime loans could end in foreclosure.

Topeka has a higher level of delinquent subprime mortgages than Wichita and Lawrence. The delinquent portion of subprime mortgages in Topeka in 2006 was 13.92 percent, up from 10.57 percent a year earlier.

The delinquent portion of subprime mortgages in Wichita in 2006 was 12.64 percent. In Lawrence, the delinquent rate was 11.5 percent, according to estimates from First American LoanPerformance and the Census Bureau.

Jerry Brown, general manager of Kaw Valley Home Loans Inc., a subsidiary of Kaw Valley State Bank & Trust in Topeka, said about 25 percent of their mortgages are subprime loans.

“Normally we try to do a fixed rate, but that is not always possible. It’s the customer’s option,” Brown said.

He said Kaw Valley generates the loans locally but sells them on the secondary market. Because the loans are sold, he said, Kaw Valley doesn’t track them.

“I don’t see it being a dire situation in Topeka,” he said. “It will kind of straighten itself out.”

But Baker said today he sees more clients in northeast Kansas with complicated financial problems than in the past.

Marilyn Stanley, spokeswoman with Housing and Credit Counseling in Topeka, said some families are forced to downsize to live within their means. And downsizing can be painful.

While experts say homeowners shouldn’t spend more than 30 percent of their income on housing, “a lot of people are at 50 percent,” Stanley said. “That doesn’t leave room for gas and utilities.” Lawrence market

Only 4.9 percent of all mortgages are subprime mortgages in Lawrence, compared with 10.53 percent in Topeka and 10.95 percent in Wichita.

Baker said there are fewer subprime mortgages in Lawrence because housing is more expensive there. Topeka and Wichita have more low-income housing.

An entry-level, two-bedroom house typically sells for $120,000 in Lawrence, Baker said. It isn’t uncommon to see three-bedroom homes in Lawrence sell for $180,000.

“It’s hard to make a subprime mortgage for $180,000,” he said. “It’s easy to get a subprime mortgage for $50,000 in Topeka.”

Neighborhood demise

Experts say home ownership will improve a neighborhood because homeowners tend to take care of their property. But a foreclosure leaves a neighborhood with a vacant house that might otherwise be healthy and vital, said Hermes, of NeighborWorks America.

“It’s an economic problem for the neighborhood, the city and the bank,” Hermes said.

The bank might be in California or Germany, he said. The bank will look at it like a blip on the balance sheet. So it will sell the foreclosed house to whatever bidder at 60 cents on the dollar. The investor buys it and converts it into a rental, he said.

One study by Duda Apgar called “Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure Boom” says a foreclosure on a single-family home, especially one left vacant, may generate $30,000 in losses per property.

Baker said Detroit, damaged by the declining auto sector, has seen neighborhoods decimated by foreclosures.

Hermes said lenders often pair up with mortgage brokers who pitch the adjustable rate mortgages to people who don’t qualify for a prime loan from such financial institutions as Capitol Federal Savings.

Jack Huey, chief lending officer for Capitol Federal, said the financial institution doesn’t offer subprime mortgages.

“Capitol Federal has sound lending policies and strong underwriting principles that mitigate credit risk for the various programs that we offer, resulting in low default rates,” Huey said.

When someone doesn’t qualify for a loan, Capitol Federal encourages the person to improve his or her financial situation. He also recommends contacting the local Housing and Credit Counseling office for educational homeownership and budgeting counseling.

Regulation needed

A top federal regulator recently endorsed congressional efforts to pass legislation cracking down on predatory lending.

“We believe that the time has come for national anti-predatory lending standards applicable to all mortgage lenders,” Federal Deposit Insurance Corp. chairwoman Sheila Bair told a House Financial Services subcommittee.

Bair suggested predatory lending legislation could require lenders to take into account a borrower’s ability to repay a loan at its full cost, not just on an initial, low teaser payment, and crack down on confusing and misleading marketing and prepayment penalties.

Stanley, of Housing and Credit Counseling, said there are alternatives besides foreclosure, such as putting the past-due amount at the end of the loan.

“There’s other options, but some people wait until it is too late,” she said.

She recommended struggling homeowners assess their entire financial situation. While setting priorities, she said, cut out expenses that aren’t needed. To get help, call Housing and Credit Counseling at (785) 234-0217 or (800) 383-0217.

Michael Hooper can be reached at (785)295-1293 or michael.hooper@cjonline.com.