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Toxic Mortgages Poison Hartford

Foreclosure filings are up 920 percent from last year in Connecticut. The governor and the banking commissioner are scrambling to address the problem.

By DANIEL D'AMBROSIO, Hartford Advocate Staff Writer

November 22, 2007

Have you noticed the HomeVestors billboards popping up around Hartford?

They're hard to miss, featuring a bright yellow background behind cartoon spokescaveman Ug dressed in a sleeveless leopard-skin toga.

Ug, with a full red beard and eyes popping like a pair of snake-eye dice, is pointing to the corporate-looking HomeVestors logo.

Under the logo is the company's claim to be "America's #1 Home Buyer," and scrawled across the top of the billboard in a crude black script is, WE BUY UGLY HOUSES.COM. Along the bottom, set off in a red banner, is the phone number to call.

There are 16 HomeVestors billboards in the Hartford metro area, according to Avon resident John Jones, owner of the first franchise in Connecticut, which opened in July.

It's tempting to liken the billboards to vultures circling the carnage of Connecticut's real estate market, where the subprime loan mess is coming home to roost just as it is in 45 of the 50 states.

Jones said he's meeting with eight to 10 people weekly interested in selling their homes as a result of the HomeVestors billboards. The company is "pretty big nationally," he said, especially in the Southeast and Southwest but is just now moving into the Northeast, with five franchises each in Massachusetts, New York and New Jersey, and a dozen in Philadelphia alone.

"We usually end up dealing direct with people in a whole host of situations," Jones said. "Lately I'm getting lots of calls from people whose mortgages have been reset and they can't afford the payment."

Although the 1,375 foreclosure filings in Connecticut in September represented a 37 percent decrease from August, as a whole, foreclosures were up 920 percent in the third quarter in the state compared to last year, with a total of 5,663 filings, according to realtytrac.com, the nation's leading authority on foreclosures. That's one foreclosure for every 251 households.

Nationally, realtytrac.com reports there have been 635,159 foreclosure filings, with Nevada posting the highest foreclosure rate in the third quarter of one for every 61 households — a total of 16,817 filings.

"It's a sad type of problem that has risen to a social level," said Connecticut's banking commissioner Howard Pitkin. "How it happened on the industry side is lax underwriting, no two ways about it. On the consumer side, all these people wanted was their share of the American dream. They thought low rates and rising values would go on forever."

In a nutshell, underwriting is the due diligence by a bank or mortgage company to make sure the person they're lending money to can afford it, based on income and expenses.

Subprime mortgages are loans that never should have been made because the recipients had only a marginal shot at keeping up with the escalating payments as the adjustable interest rate began ratcheting up after two years. In some cases, borrowers had no shot.

"I think Hartford is going to be challenged with working out these loans to help keep these people in their homes," Pitkin said. "That's the challenge in all the cities in Connecticut and across America."

To help meet that challenge, Gov. M. Jodi Rell announced a $50 million program on Nov. 8, called "CT FAMILIES," that will "assist low and moderate income borrowers who took out a subprime loan to purchase their first home by refinancing them into 30-year, fixed rate amortizing loans."

Pitkin said the $50 million is enough to help 400 to 450 families, and if those families are able to make their payments, the fund will grow and more money will go out.

While Pitkin expects that to happen, he says the state can't possibly solve the subprime problem on its own. It will take the assistance of both local and federal government.

And perhaps divine intervention.

There are 71,000 active subprime mortgages in Connecticut, and many are delinquent and in danger of default, according to the governor.

Of those 71,000 loans, 21,000 are scheduled to reset at much higher interest rates between October 2007 and December 2009.

"So that's a time bomb," said Erin Boggs, an attorney with the Connecticut Fair Housing Center. "Some people call these toxic mortgages."

Boggs said the people saddled with toxic mortgages often didn't realize they were getting into adjustable rate loans, or assumed they would be able to refinance into a fixed rate just in time.

"As long as prices were going up, that was safe, but now that we're seeing a drop in property values we're really running into problems," said Boggs.

While it may be too late to help thousands of Hartford and area families who are about to face foreclosure, there may be some new state laws coming to prevent a crisis on this scale from happening again.

Pitkin and the lawyers he employs in the banking department are in the process of drafting a mortgage lending bill that will be introduced in the February session of the General Assembly.

Although Pitkin declined to discuss specifics that might be included in the bill, Boggs said the assumption is that there will be some tightening of underwriting standards, and that the worst kinds of loans, such as so-called "no document loans," will be specifically addressed.

No document loans are exactly what they sound like, loans that are made without any proof of income or expenses.

In the freewheeling past, Boggs explained, brokers simply bundled these no-document stinkers in with lots of other loans and sold them to banks or investors to collect on. It's a practice that has recently brought down the chief executive officers of some of the nation's biggest investment firms, like Merrill Lynch and Citibank.

Boggs is adopting a wait-and-see attitude toward the state's efforts to quell the subprime disaster, but she's already worried that legislation might not go far enough.

"My fear is there will be some short-term tightening on some underwriting standards but in the long run if there's not regulation and the incentive system stays in place we'll simply return to the Wild West of lending," said Boggs. "The bottom line is we need laws that create accountability so loans aren't made in the first place."

Back now to the billboards that have popped up all over the city advertising a service to buy homes. Ug, says Jones, was conceived as a fitting mascot for the company's trademarked slogan — ugly being both a literal description of the kinds of houses the company buys and a euphemism for the circumstances sellers find themselves in.

"We help people out of ugly situations," said Jones. "We offer what Carmax offers. Drive right in and get a written offer on the spot good for seven days."

That offer will typically be discounted 30 to 40 percent off the fair market value of your home, but there will be no question you'll get your money and get it quickly, said Jones. Also, you can literally walk away from the house.

"The house can be in 100 percent 'as is' condition," Jones said. "You can literally leave it full of junk. If there are raccoons in the chimney, we'll take it."