About four years ago, a hail storm damaged the house belonging to a woman we'll call Gloria. Gloria is from St. Paul and she lives in the Frogtown area. We agreed not to use her real name because her family doesn't know she was on the brink of foreclosure.
A couple of years ago, she got a home equity loan to repair her house. A new adjustable rate mortgage had a fixed interest rate for only two years. Then, the interest rate on the loan jumped from 8.5 percent to 13.5 percent and Gloria's payments went from about $750 to $1,250 a month.
"You know, that's more than I bring home. So I couldn't pay it," she says."
Gloria's story is similar to almost 4,500 people who went through foreclosure in the last year. But her story has a positive twist. She successfully re-negotiated with her lender just a few days in advance of foreclosure.
Research shows most foreclosures happen in the first three years of the loan. Laura Smith, a geography professor at Macalester College, has studied foreclosures in the Twin Cities with her geography classes since 2004. Smith says many adjustable rate mortgages encouraged people to buy more house than they could afford because of low payments and interest rates that changed after a few years.
"We don't know how many other mortgages out there had high interest rates that didn't get foreclosed on, but we do know that in the pool of foreclosures, a bunch of them had really high rates," Smith says.
Smith says she saw many interest rates exceed 14 percent at a time when the average rates were hovering around 7 percent. She found some homes went into foreclosure for as little as $4000. She says people accepting bad loan terms speaks to the need for education efforts. And those efforts are starting to gain some momentum.
“The first place they are going turn is to their church, their pastor, or their religious community looking for help.”Alexa Milton
Alexa Milton, office director of ACORN Housing in St. Paul says the local housing chapter is teaming up with new partners to increase their education efforts.
"If you start falling behind on your loan, a lot of people the first place they are going turn is to their church, their pastor, or their religious community looking for help," Milton says. "(They ask for) Either for moral support or financial help to get out of the situation, and so the churches are really feeling the crunch as well."
Starting in February, two churches in St. Paul will begin to offer foreclosure prevention workshops. So far, Milton says there are about five churches on board with this project. She says ACORN is hoping to enlist as many churches in the Twin Cities as possible. Workshops will target first-time homebuyers, those who want to safely refinance a home, and homeowners at risk for foreclosure.
More realtors are seeing clients who face foreclosure and that's bringing realty experts into this issue. Christopher Galler, vice president of the Minnesota Association of Realtors, says since realtors are seeing more people with pre-approved, high-interest loans, they want to be proactive about foreclosures.
"Now that the rates are increasing at such a significant rate in parts of the state, more realtors are running into people now and then," Galler says. "And of course realtors as professionals want to make sure they have knowledge and information to assist people through those transactions.
Galler says a number of realtors are starting to take courses to teach their clients, not only how to buy a home, but how to stay in a home.
It's a pattern Autumn Lubin, president of the Minnesota Mortgage Foreclosure Prevention Association, has also noticed. She has her own foreclosure prevention consulting firm and she recently taught a three-hour class on foreclosure prevention to 80 local realtors.
"I don't think I've been asked to stay after a class with questions for as long as I did there, ever, in all the years that I've been doing training." Lubin says.
Lubin says most families aren't talking to their lender when problems with their loans arise. Instead they seek out their realtors. She says realtors can play a significant role by just encouraging their clients to touch base with their lenders.
Lubin says many loan products, like adjustable rate mortgages and negative amortization loans, were designed for a niche market. This is why much of the education effort on foreclosure prevention focuses on people, like Gloria, who've taken out loans with adjustable interest rates to refinance their home or consolidate their debt. Community organizations, local clergy, and realtors, are eager to give people the knowledge to recognize good loan terms from bad ones.
Gloria's new loan terms aren't ideal, but her interest rate is now fixed, her monthly payments are manageable, and she gets to keep her house.