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Foreclosure: I Didn't Think It Could Happen to Me

Foreclosure explosion spreads to middle-income Americans with fixed-rate loans.

For 11 years, Ron and Sharon Pizer never missed a payment on their three-bedroom home in North Ilion, N.Y. But a year ago, their modest used-car business dried up. Suddenly, the couple had a problem paying their fixed-rate mortgage.

“My Social Security wasn’t covering our living expenses,” said Ron Pizer, 69. “We had no money coming in, and when you have no money coming in, things happen.”

In June, the Pizers joined the latest group to be threatened by the nation’s record foreclosure crisis: middle-income Americans who had fixed-rate loans, among the safest on the market.

Widespread job losses and falling household income have changed the nature of the foreclosure explosion. The crisis began nearly two years ago with subprime mortgages offered to borrowers who were poor credit risks, but has now spread to prime fixed-rate loans.

This latest twist was reflected in a recent report by the Mortgage Bankers Association, which said that one in three mortgages in foreclosure in this year’s second quarter had a fixed rate. During the same period last year, it was one in five.

In many cases, those homeowners in foreclosure are people who thought it could never happen to them. “These are not people living on the edge,” says Michael Fratantoni, vice president of the MBA’s single-family research division. “These are your more conservative homeowners who’ve lost their ability to pay their loans because they’ve lost their jobs.”

An estimated 70 percent of all mortgages in the United States are fixed-rate loans. Many are held by people in the 55-plus age group who bought their homes years ago when other types of mortgages were less common.

Fratantoni predicts that foreclosures on fixed-rate mortgages will continue to spike through the middle of next year as double-digit unemployment spreads to more states. He says the ample inventory of unsold homes—almost 4 million in August—will continue to hold property values down through most of 2010.

It’s hard to imagine that the epidemic of foreclosures could get worse. In the first half of this year alone, foreclosures reached 1.9 million, a 15 percent increase over the same period last year, according to RealtyTrac, which tracks filings. Last year, there were more than 3 million foreclosures, a record. The MBA reports one in 25 homes is in foreclosure, and one in 10 borrowers is behind in payments.

Federally supported efforts to stem the tide of foreclosures, such as Hope NOW or the Obama administration’s Making Home Affordable plan, have led to 360,000 loan modifications since March. But mediation—refinancing, reducing the principal balance on a loan or extending loan terms—has helped only a fraction of distressed borrowers remain in their homes.

In a recent report, the National Consumer Law Center criticized lenders for setting unreasonable barriers to mediation plans. But lenders say they have been overwhelmed and are adding staff to ramp up negotiations.

Erin Angell Collins, a spokeswoman for NeighborWorks America, a nonprofit housing group, says lenders have been helpful in counseling home­owners. “It’s taking them a while to respond,” she says. “Quite frankly, many were caught unprepared for the blizzard of foreclosures that we’re seeing today.”

Kathleen Day, a spokeswoman for the nonprofit Center for Responsible Lending, says Congress should have made it mandatory, not voluntary, for lenders to help troubled borrowers with foreclosure prevention programs early in the crisis.

“More people are being helped now, but it’s eclipsed by more people needing help,” she says. “It’s getting worse, and it’s heartbreaking.”

In July, the Federal Reserve Banks of Boston and Atlanta reported that U.S. lenders had agreed to accept lower payments on only about 3 percent of seriously delinquent mortgages. The study said lenders saw little reason to make the costly modifications because many borrowers are able to “self-cure” by catching up in their payments, and others default even after the mortgage terms are renegotiated.

Ron and Sharon Pizer were among the luckier ones. Because they have a small income—his Social Security and Sharon’s new job in retail—they were able to get their lender to extend their loan by shifting the bulk of their eight missed payments to the back end. But even so, Ron Pizer says they’re facing an uphill battle.

It’s people like the Pizers who seek help from the Consumer Credit Counseling Service of Greater Atlanta hotline. Spokesman Scott Scredon says that between January and August, 81,500 people nationwide received foreclosure prevention counseling—double the 2008 figure. More than 70 percent said they or someone else in their household became unemployed or had a reduction in income; 69 percent had fixed-rate loans.

“We’re seeing a gradual increase this year, especially in recent months, of people who’d typically be considered middle-class Americans with two-income households, and now for a variety of reasons—lower commission sales, state employees furloughed a few days a month—they’re calling us,” says Scredon.

Veronica McGill, 55, had no trouble paying the $1,850 monthly mortgage for her home in Maryland until she lost her job as a legal assistant in financial services. She quickly ran through her savings.

Now, she’s in foreclosure proceedings. With no income, she’s unable to refinance or get her loan modified. And she can’t afford to sell, since she won’t make enough to pay off her mortgage.

“I thought I’d be able to get another job right away,” says McGill. “If I don’t get one soon, I’ll be living under a bridge.”

Carole Fleck is a senior editor at the AARP Bulletin.