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Homeowner's Hopes Ride With State Mortgage Reform Bill

KENNETH R. GOSSELIN

May 11, 2008

There's a sense of ownership pride along with signs of stress at Lisa Murzin-Pelcz's home on Winding Lane in East Hartford.

Her wooden swing adorns the front yard, and a banner with flowers and a ladybug hangs by the door. Around back, an old floor tile and duct tape stand in for a broken window pane. Duct tape is handy for home emergencies, but it can't fix a financial crisis.

Murzin-Pelcz is in the final stages of foreclosure, and could lose the house she has lived in for 12 years when court proceedings start on June 10, exactly one week after her 46th birthday. She now knows how much of a mistake it was to refinance her home loan into an 11.75 percent subprime mortgage two years ago, at the peak of the housing boom.

Murzin-Pelcz's story could be repeated over and over across the country. A single mother trying to make ends meet taps into her home's equity after falling behind in her mortgage payments. She knows the wildly high interest rate will cost her more in monthly payments, but it's the only way to get out of a failed marriage, take control of mounting bills and get a fresh start.

Her mortgage broker tells Murzin-Pelcz not to worry, that she'll be able to refinance out of that high rate after a year.

Now, her home's value has plunged, leaving her owing more than the four-bedroom cape is worth. And no one will agree to refinance her mortgage.

Her hopes ride with a mortgage reform and bailout bill the state legislature passed on Wednesday, in the final hours of the session. As federal homeowner assistance stalls, Connecticut's plan — which Gov. M. Jodi Rell is expected to sign into law — could help borrowers like Murzin-Pelcz stay in their homes.

That would help stanch the spreading economic malaise caused by mortgage failures that are pushing home values downward.

The bill expands financial assistance to homeowners who are in deep trouble but can repay the loans. All told, it sets aside about $140 million, mostly starting July 1. It also sets up mediation between borrowers and lenders in the courts.

And it tightens up requirements for lenders who make subprime loans. That, along with similar measures across the country, could help to prevent another crisis in home lending.

Murzin-Pelcz's hopes might be a long shot. Time is running out, and even if she wards off foreclosure long enough to seek a state bailout, her income as a teacher's assistant in her hometown's middle school would barely cover a mortgage at normal rates.

And with late payment penalties and falling values, her home is worth nearly $50,000 less than she owes.

The mother of three already didn't qualify for Rell's "CT Families" mortgage assistance program. Still, she's eyeing the new legislation, under which the Connecticut Housing Finance Authority would buy bad loans from lenders and set up new repayment plans.

She'd have to show that she could make those payments, a tight squeeze on her take-home pay of $1,800 a month, which includes child support for her 3-year-old son. If she could get an interest rate of 6 percent, she believes she could make the payments.

"Please God, this is the miracle that I need," Murzin-Pelcz said, sitting at her kitchen table, her cat Fluffy jumping into her lap. "This is my home. It's all that I've got."

The Hamster Dream

Murzin-Pelcz's predicament, multiplied across the country, has become a worsening economic trend, driving the nation into recession. Nationally and in Connecticut, the central issue is whether the government should bail out homeowners with subprime mortgages who now find themselves in trouble.

Should taxpayers help out homeowners who should have known better than to expect the market to keep rising? What about those who were duped into mortgages by unscrupulous lenders?

A bailout means homeowners aren't fully responsible for their actions. But without a widespread bailout, the mortgage crisis deepens — and could end up costing taxpayers even more.

In Washington, Congress and the Bush administration are far apart on the issue.

Critics of bailout plans say taxpayers shouldn't cover for borrowers who should never have been in their homes in the first place. It's more complicated for borrowers like Murzin-Pelcz, who didn't buy her house during the overheated market of the past few years.

In fact, by seeking the American dream of ownership in 1996, Murzin-Pelcz was doing the right thing at the right time. The housing market in Connecticut was just emerging from a prolonged, devastating downturn. Values would soon explode.

Murzin-Pelcz's path to homeownership wasn't easy. With two small children, she left her first husband in the early '90s. She lived in a homeless shelter and then in subsidized low-income housing in East Hartford. She was on welfare by then, and lived with a friend for a while.

She was able to save for a down payment after her first husband died and she and each of her two daughters qualified for Social Security benefits.

The house, right in the town where she was raised, cost $80,000, and she had state help as a first-time, low-income homeowner. At 7.5 percent interest, her monthly mortgage payment with escrowed taxes and insurance premiums totaled of $970 — barely more than what it would have cost to rent.

Money was tight even after she got a job with the local school system. She worked a second job nights after her kids got older, but still needed to take a small, second mortgage to pay off some bills.

However fragile, it appeared Murzin-Pelcz had a piece of the dream. And it was that way for eight years. But an ill-fated second marriage in 2004 cost Murzin-Pelcz her Social Security benefits and time from work when she became pregnant.

Her troubles deepened because her husband's paychecks were spotty — and the bills piled up with a new baby and two teenagers.

By the end of 2005, the house was worth $167,000 — a blessing. She badly needed money to pay for a divorce lawyer and consolidate other bills, including a car loan.

With shattered credit, the refinanced mortgage she was offered was set at 11.75 percent interest. Her monthly payment jumped to $1,384 but she handled it for about a year. But when her oldest daughter turned 18 and no longer qualified for the Social Security payments, she quickly fell behind on the mortgage.

A second mortgage last summer — seen as a way out — didn't help and added another $284 a month to the bills. The bank holding her mortgage sent her a foreclosure notice in December.

"I was like a hamster or gerbil in one of those wheels," she said.

Fixing What's Broken

Like millions of other Americans, Murzin-Pelcz was counting on an ever-rising value to keep her financially afloat. In Connecticut, notices of foreclosure actions continue to rise, jumping nearly 55 percent in the first three months of this year compared with a year ago.

There are an estimated 71,000 subprime mortgages in the state worth about $15 billion, an average of just over $200,000 each, with as many as 8 percent seriously delinquent.

Murzin-Pelcz's best hope is for a renegotiated loan at the current value of the house, $97,000, and an interest rate of 6 percent. That would cost $581 a month plus taxes and insurance, and she said she could swing that.

"If I was smart, I would have sold in 2004," Murzin-Pelcz said. "But I wanted my house. This is my house."

She's learned to do repairs herself because she couldn't afford calling in a professional.

"I fixed my own sink, the toilet when it wasn't working," she said. "I did it myself. I didn't know how to fix a window, but I had duct tape and some leftover bathroom tile."

She's been watching the developments in the state Capitol just a few miles away as a newly active member of the Association of Community Organizations for Reform Now — ACORN — an advocacy group.

As Murzin-Pelcz's foreclosure unfolded, legislators, lobbyists, the state Department of Banking, housing advocates and Rell's office worked right up until last week negotiating the details of the new legislation, co-authored by state Rep. Ryan P. Barry, D-Manchester, and Sen. Bob Duff, D-Norwalk.

The legislation keeps Rell's "CT Families" program, aimed at first-time homeowners and those who refinanced into adjustable-rate mortgages. It adds two new components: the Homeowner Equity Recovery Opportunity (HERO) and the Emergency Mortgage Assistance Program (EMAP), both beginning July 1.

HERO provides $30 million for the Connecticut Housing Finance Authority to buy mortgages from lenders and then place borrowers on an affordable repayment plan. Murzin-Pelcz's best shot is with this program.

EMAP, a $64 million program, requires lenders to give borrowers the option of seeking help from CHFA in making mortgage payments before bringing foreclosure action.

In addition to the programs, the reform bill makes changes to protect future subprime borrowers from prepayment penalties, which Murzin-Pelcz now faces, and generally does not allow lenders to boost interest rates when the mortgage is in default.

The bill also requires lenders and brokers to carefully evaluate whether borrowers can repay their loans, especially if monthly payments could rise. It requires that taxes and insurance premiums be made part of the payment.

Housing advocates are praising the assistance programs and the reforms passed by the legislature, though they say more changes are needed.

"What is in there will protect the majority of the people that we see," said Erin Kemple, executive director of the Connecticut Fair Housing Center, which helps borrowers facing foreclosure.

Kemple and other advocates say they will continue to press for more protections.

"We will definitely be back in the next session," ACORN organizer Nicholas Graber-Grace said. "The bill falls short when it comes to some of the regulatory aspects."

Thinking Of The Future

When she bought her house, Murzin-Pelcz looked on it as something tangible for her children.

She'd known what it was like living in a shelter and then, low-income housing.

"I wanted them to have something if something happened to me," Murzin-Pelcz said.

Barry said the bill has the potential to preserve those kinds of dreams for thousands of homeowners. It strikes a strong balance, both helping families in need now and making sure that consumers are protected when they borrow to achieve that dream.

Duff said the assistance programs aren't a giveaway.

"This is not a handout," Duff said. "This is a hand-up. This is a way to actively protect our state's economy and keep people in their homes."

While Murzin-Pelcz waits to see if she will get help with her mortgage, she faces an uncertain future and may once again be without a home.

She doesn't want to go back to low-income housing. She liked the people but not the environment.

"No one cared about it because it wasn't theirs," Murzin-Pelcz said.

Contact Kenneth R. Gosselin at kgosselin@courant.com.