Atlanta Journal-Constitution: How exotic mortgages became time bombs

How exotic mortgages became time bombs
By Carrie Teegardin, John Perry

The Atlanta Journal-Constitution

Sunday, May 31, 2009


Four years ago, when subprime mortgage loans were hot commodities, investors enthusiastically bought pieces of a pool of 5,500 mortgages that covered $984 million in homeowner debt.

At the time, the Bear Stearns Asset Backed Securities I Trust 2005-HE10 seemed like a promising opportunity for strong returns.

When they bought into the pool, investors acquired the mortgage of Johnnie and Lillie Bussie of south Atlanta and many others like it. Facing a tax lien on their tidy brick ranch house in 2005, the elderly couple decided to refinance their fixed-rate note.

They left the closing with two loans: one with a rate that would adjust after two years, and the other, a second mortgage — a 15-year balloon note at the rate of 10.5 percent.

The deals turned out to be a financial suicide pact.

The Bussies couldn’t afford the new loan and are being threatened with foreclosure. The investors in the pool own a dud: Payments on 48 percent of the debt in the trust are delinquent. And Bear Stearns, the storied global investment bank that brought borrowers and investors together, collapsed as one subprime investment after another went bad.

Similar financial deals continue to self-destruct by the thousands across metro Atlanta every month. To assess in detail the causes and costs associated with the mortgage meltdown, The Atlanta Journal-Constitution conducted a groundbreaking analysis of foreclosure and mortgage lending data in every neighborhood in a 13-county area. ..........(more)

The complete piece is at: http://www.ajc.com/metro/content/business/stories/2009/05/31/foreclose_atlanta_homes.html

» Subprime lending is driving the foreclosure surge. The presence of subprime loans, by itself, explains 70 percent of the differences in foreclosure rates among census tracts.

» Three other factors also pushed up a neighborhood’s foreclosure rates: lots of investor-owned properties, lots of second mortgages, and mortgages that ate up a relatively large portion of a homeowner’s income.

» Race, by itself, is not driving up foreclosure rates in minority neighborhoods. Minority neighborhoods are experiencing higher foreclosure rates because black home loan applicants were more than twice as likely to get high-interest loans as white home buyers. After accounting for who received high-cost mortgages, the impact of race on foreclosure disappears.

» For black applicants, higher incomes didn’t improve their chances of getting prime loans: 58 percent of black applicants in the lowest income group got conventional loans compared with 60 percent in the highest income group.

» Congress passed a law in 1994 requiring greater disclosures to consumers taking out high-rate, high-fees loans. But the standard defining such loans was so high that it did virtually nothing to protect home buyers. It affected only 351 of about 200,000 subprime loans made in metro Atlanta from 2004 to 2007.

==This is pretty explosive info if you ask me.