Kentucky near top in foreclosure rate

Kentucky Foreclosure & Real Estate News

By David Goetz
dgoetz@courier-journal.com
The Courier-Journal

The number of Kentuckians buying homes reached an all-time high last year. But some of those buyers are having trouble keeping up with the payments.

One in every 57 residential mortgages across Kentucky -- nearly 2 percent -- was in foreclosure last summer, according to the national Mortgage Bankers Association.

n Indiana, the rate was nearly 3 percent, putting it second in the nation behind Ohio. Kentucky was fifth, behind Michigan and Katrina-ravaged Mississippi.

In Louisville, there's been a flurry of foreclosure sales -- Jefferson Circuit Court ordered a record-tying 2,620 sales last year and is on a pace to set an all-time high this year.

"We are scheduling 125 parcels every other Tuesday for 2007," said Daniel T. Albers Sr., master commissioner for Jefferson Circuit Court. "If this holds for the year, we will schedule 3,125 parcels this year."

The Mortgage Bankers Association blames slow job growth -- just over 1 percent last year in Kentucky, compared with nearly 2 percent nationally -- and rising interest rates for the foreclosure rate spike.

But some in the lending business say some responsibility lies with an industry that's been too eager to arrange costly, nontraditional loans for low-income borrowers and those with bad credit histories.

Adam Hall, president of the Louisville chapter of the Mortgage Bankers Association, is concerned, for example, that so many foreclosures involve adjustable-rate mortgages and other higher-interest loans.

Too many borrowers "don't understand the type of loan they're getting themselves into," Hall said.

Pearl McDole, 73, was one of those borrowers. She said she thought she was getting a fixed-rate mortgage when she borrowed against her Louisville home for some renovations in 1999.

But the interest rate was fixed at 8.8 percent for two years, then allowed to change up to 1 percentage point every six months. McDole said her payment started at about $400 and had reached $615 in August, when she was laid off from her job.

She said she planned to make up missed payments with her unemployment checks, but before she could, a sheriff's deputy showed up at her door with a foreclosure notice.

"I was shocked," said McDole, who is working with a Legal Aid attorney in an effort to keep her home.

"I don't know where I'd go," she said. "I've been here 23 years."

Guidelines for lenders

Louisville bankruptcy lawyer Nick Thompson said he has heard lots of stories like McDole's and seen many clients who took out higher-cost, nontraditional loans they can't afford.

"About a third to a half of people who come in" have a mortgage that's wrong for them, he said.

In November, Kentucky's Office of Financial Institutions issued guidelines to protect borrowers from loans they can't afford. The guidelines advise lenders to consider a borrower's ability to repay the loan before issuing one.

While the office, which licenses mortgage companies, has only limited powers if lenders do nothing illegal, its guidelines note that regulators will "carefully scrutinize risk management" on such loans.

And it says, "Providers that do not adequately manage these risks will be asked to take remedial action."

In Indiana, mortgage bankers have joined Realtors and regulators to find out why the foreclosure rate is so high.

Realtor Gary Avery of Indianapolis thinks the main cause is a change from manufacturing to lower-paying service jobs. Overall job growth in Indiana was less than 1 percent last year.

But Avery said certain mortgage loans are a factor as well.

For example, a lot of builders have been offering "buy down" loans on new construction with interest rates that could start at, say, 4.5 percent and go up to 6.5 percent over two years.

Problems arise when buyers can qualify for a loan only at the lower rate.

They assume they'll find ways to cover the monthly payment when it rises -- possibly by hundreds of dollars a month -- Avery said, but that doesn't always happen.

Also, Indiana's property-tax system doesn't assess new construction until the third year. And when that happens, it can put the house payment out of reach for a buyer who was just barely covering the monthly expense.

"All of a sudden," Avery said, "you're under water."

Sub-prime loans

Loans to riskier borrowers, so-called sub-prime loans, have higher interest rates and often are loaded with fees, said Harold Turner, assistant Kentucky attorney general in the Consumer Protection Division.

While they're more expensive, brokers market them to the working poor. "The sub-prime profit is very high," Turner said, and "sub-prime lenders tend to be more aggressive."

Such nontraditional loans became more common in the past few years as big banks and Wall Street investment firms began buying up the higher-profit loans from mortgage brokers and bankers that originated them.

With the Federal Reserve pushing interest rates higher, payments on adjustable-rate loans have jumped.

The national delinquency rate on loans -- reflecting people who are behind on payments but not necessarily in foreclosure -- rose from 4.3 percent to 4.7 percent in a year, said Mike Fratantonio, senior economist for the national Mortgage Bankers Association.

"This increase is primarily coming from borrowers with adjustable-rate loans, particularly buyers with sub-prime credit," Fratantonio said.

Some mortgage professionals argue that the foreclosure trend is a market correction, a shake-out of a relatively few bad loans in what had been a booming housing market.

The system "works for 98 percent of the people," said Chris Evans, president of the Mortgage Bankers Association of Kentucky.

Evans said he knows some bad mortgages are sold, but there are "10 times as many cases where people have been put in the right" mortgage.

Lenders don't want to "set people up to fail," Evans said. "On the other hand, you do have to reach out to different segments of the market and give them a little bit broader guidelines and a little bit broader underwriting approval to get them in a home."

 

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