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VOL. 122 | NO. 235 | Tuesday, December 11, 2007

Interest Rate Freeze Could Have Minimal Impact in Memphis

By Eric Smith

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U.S. homeowners facing a spike in the interest rates of their adjustable-rate mortgages could benefit from a plan outlined last week by the Bush administration, but how much aid it brings to Memphis and the Mid-South remains to be seen.

At the federal government's request, the mortgage industry has agreed to a five-year freeze on rates for a portion of the roughly 2 million subprime loans nationwide that are scheduled to reset to higher rates over the next two years.

The move is aimed to prevent homeowners from going into default if their payments climb too high - a scenario that has plagued the country during 2007 and resulted in a record number of foreclosures.

In a press conference at the White House Thursday, President George W. Bush, U.S. Housing Secretary Henry Paulson and U.S. Housing and Urban Development Secretary Alphonso Jackson discussed the plan, which will be available only to homeowners who are current on their house payments and living in the home. Non-owner-occupied homes are not eligible.

The freeze will apply to loans made between Jan. 1, 2005, and July 30, 2007, and will cover loans scheduled to reset to higher rates between Jan. 1, 2008, and July 31, 2010.

"This is a bold move," said Phyllis Betts, director of the Center for Community Building and Neighborhood Action. "To the extent that lenders see it is in their interests to cooperate, some of them may choose to do so. But there are already complaints coming from investors, who will have to be persuaded that their investments will retain more value with forbearance than with foreclosure."

It's a start

Specifically, how much will the plan aid Memphis, where foreclosures have run rampant all year? Steve Lockwood, executive director of the Frayser Community Development Corp., has mixed feelings.

"It's better than nothing," he said. "It's certainly not a universal solution, and there's probably not a universal solution out there. We feel like in Frayser and other similar markets in Memphis, there are an awful lot of people who, even without good cause, are routinely late enough on their payments that they won't qualify for this thing."

Lockwood offered guarded support for the program, but he warned that any kind of plan that doesn't include required credit counseling, that doesn't strive to help people become more financially literate, wouldn't be a good long-term answer because otherwise people will end up in these problems again.

"Without all of that, all you're doing with a program like this is delaying some other inevitable," he said. "That said, I'm probably in favor of that, because at least you're spreading the pain out over some period of time, and you're taking the tidal wave and breaking it into sort of big waves. That ought to be part of the solution now or as a follow-up."

Tough market

Chris Bowers, mortgage loan officer with Bank of America and 2008 president of the Memphis Mortgage Bankers Association, also raised concerns about the program's reach.

"I'm sure there will be some impact on local borrowers because as the nation goes, so goes Memphis," he said. "But I really don't know that it's going to go all the way and have a major impact on borrowers in Memphis and the foreclosures that we have here."

The city has become a notoriously bad place for foreclosures, ranking consistently near the top of metro areas for foreclosures per capita, according to Irvine, Calif.-based RealtyTrac Inc.

The third quarter of 2007 was particularly disastrous for Shelby County, which saw the total number of foreclosure notices rise 24 percent from Q3 2006 and 37 percent from Q3 2005, according to The Daily News Online, www.memphisdailynews.com.

Moreover, things got worse in November. There were 1,084 first-run foreclosure notices issued, meaning homeowners were notified that they are in default on their loans and could lose their property through foreclosure if they are not able to pay.

The month had 517 actual residential foreclosures, up from 499 in November 2006. But the most telltale sign comes when looking at how this year's numbers compare to November 2005, which registered just 299 foreclosures.

Multiple sources to blame

The seeds of the national subprime fallout and foreclosure fiasco were planted in 2004 and 2005. During those two years numerous homebuyers were put into ARM products that featured a low teaser interest rate and corresponding low monthly payment.

But, after two years, the loans reset to a much higher rate and the borrowers no longer could afford the monthly payments. Many homeowners had no choice but to default and go into foreclosure.

Predatory lending and misinformation didn't help.

"Combining that with a naïve public can cause problems," Bowers said. "We end up with a lot of folks in loans that they maybe shouldn't have been in."

The problem in Memphis is getting word to those at risk, not always an easy task for the hardest-hit communities, such as Frayser.

"Most people find out they have an adjustable-rate mortgage when it adjusts," Lockwood said. "There's blame on all sides. I don't put it all on the consumer, nor on the people who make the mortgage or the Realtors. There are unethical people in every level of the food chain."

The Associated Press contributed to this report.

For information on the rate freeze, including questions regarding qualifications, call 1-888-995-HOPE (4673) .

PROPERTY SALES 0 133 1,342
MORTGAGES 0 131 1,047