Memphians Mark Jones and Ted Houston say they have turned informant. But not in the way you might think. The duo both spent 12 years as mortgage bankers in what was recently a booming market. But in March, they started the Tennessee Housing Protection Agency, a nonprofit dedicated to helping Memphians keep their homes from foreclosure and helping Memphis keep its value.
"We'll tell you exactly what [kind of loan] you're getting," says executive director Jones. "We'll say, this is a great loan, or, here are our concerns."
In their previous lives, Jones and Houston worked for a corporation based out of California. Earlier this year, however, the company decided it could no longer afford to serve Memphis, a city with the nation's highest bankruptcy rate and on the Top 10 list of cities with the highest number of foreclosures. The risk was simply too great.
Beginning late last year, the national subprime mortgage market has collapsed. In the last three months, Jones and Houston estimate that a total of six mortgage companies have left the Memphis market.
"They say they lose more money being in the city of Memphis than they can make," says Jones.
In Memphis, a whopping 26 percent of the total mortgages are subprime. Homeowners with subprime mortgages could not qualify for a prime-rate mortgage because of past credit problems or bankruptcies and thus have higher interest rates and more expensive loans.
Unfortunately, it is estimated that 20 percent of recent subprime mortgages will go into foreclosure and that more than 2.2 million Americans will default on their loans.
The Tennessee Housing Protection Agency aims to change that figure locally. Its twofold mission is to help homeowners who are already in danger of losing their homes and to make sure that potential homeowners understand what kind of loan they can afford.
"People [in danger of defaulting on their loans] are scared to talk to the mortgage company, because they don't have the money," says Jones. The pair say they know who to call within a company and can try to work with the company to set up a payment plan.
"Sometimes," says Houston, the agency's program director, "I'll go over everything, and I just have to be straight with them: You're going to lose your home. My advice would be to sell the house. Even though the market is moving slow, it won't get foreclosed and you might leave with a little money."
The organization has created a program called "Neighbors Helping Neighbors" with several local churches designed to get funds to people facing foreclosure.
"We're not just going to give you a check," says Houston. "You'll have to go through counseling. We'll have to see how you can solve your financial problems."
Though most of the people who walk through their door are already in trouble, Jones and Houston say their other mission is to provide a much-needed second opinion to prospective homeowners. "The homeowner gets so caught up in home ownership and how big the house is, they'll get it by any means necessary," says Jones.
Jones and Houston have heard all kinds of horror stories: brokers who have changed people's pay stubs or W-2s, or adding a roommate's income to the loan paperwork even though the roommate is not co-signing for the house.
"They'll get it done for the customer," says Jones, "but it's going to come back on the customer."
It might be easy to blame the consumer for taking on a loan they can't afford, but with Adjustable Rate Mortgages (known as ARMs) and interest-only mortgages being common offerings, that seems too simple.
Under an ARM, your interest rate is fixed for a certain number of years, usually starting at a discount rate. After that time period, it changes to a higher rate.
"With the ARM, people are told they can come back and refinance," says Jones. "That's assuming that their credit score is going to improve or their salary is going to increase. Seven times out of 10, that doesn't happen."
When I was looking at houses, I needed a loan. My mortgage banker kept trying to sell me on an ARM. First he said I was young, I probably wouldn't be in the house that long, and it would save me money. And, he said, this way I could get a bigger house. I figured I was already getting a big enough house, but he argued that I could make more money off a bigger house when I decided to sell it. Great rationale in a sellers' market. But that isn't the case anymore.
It seems to me that foreclosures cost the entire community. Even if your neighbor's money problems don't affect you, his foreclosure will, by dropping property values in the neighborhood. And then, of course, there's the human cost.
"Someone has lost their home," says Jones. "Foreclosure is just a fancy word for homeless."