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This interview appears in the December 21, 2007 issue of Executive Intelligence Review.

An Eightfold Explosion in Foreclosures

Cathy Hinko is director of the Metropolitan Housing Coalition of Louisville, Kentucky. The Coalition has studied the explosive growth and changing pattern of home foreclosures in Louisville and its surrounding Jefferson County, for several years. She was interviewed on Dec. 7 by Paul Gallagher.

Q. First of all, I would like to ask—Louisville and Jefferson County appear to have a very high foreclosure rate during 2007, something like 2,500 homes owned by banks, and it looked as though there were no more than 70,000 owned homes in the city. Is this what you're dealing with?

A. I want to make sure I do "apples" and "oranges." I can track the "apples" of orders for sale. And in Kentucky, orders for sale come at the end of a foreclosure process. So, these are people who actually went all the way through and got an order for sale. In 1996, there were 497 orders for sale; in 2007—and we know this, because they're scheduled through the end of the year—there will be over 3,100 orders for sale in the same area.

Eightfold [increase].

So we know that the numbers have increased this much. And for us, it's been a housing crisis for a long time. The two coasts are experiencing an enormous rise in foreclosures; but we've been experiencing it for several years, dramatically going up in 2004 and 2005.

We did a short study on the orders for sale in 2005, for a six-month period. And we have some baseline information.

In 2007, we looked at all foreclosures filed from Jan. 1 to June 30 here in—when I say Louisville, I mean Jefferson County, because we're a metro form of government. That's the "orange." Now, I'm going to talk about foreclosures filed, as opposed to orders for sale.

We're on track to have over 3,400 homeowners in Louisville Metro at the point that they're actually having a foreclosure filed to dispossess them of their homes. So of course, we can't even begin to calculate those who are struggling to make payments, or are currently in default, but have not reached the point of legal action.

You asked about the rate. I can only say, from the 2000 Census, in Jefferson County, the number of owner-occupied units was 186,358.

Q. Sounds like something like one out of 50-60 homes [3,400 out of 186,348].

A. Currently, yes. Now, there probably is a higher homeownership number than that [now]. 2000 was the last time that I could get a number for the number of occupied units in Jefferson County.

But, I also know that the Office of Financial Institutions of Kentucky cited a statistic, that Kentucky will have 1.9% of all homeowners will go into foreclosure. But they also have estimates about who's in default; and that was over 5% of all homeowners. So, that's the situation in Kentucky and in Louisville.

Q. Can you say what is the cause, or causes, of it? You're saying that this has come mainly in the last three years, since 2004.

A. The causes of it—the thing we see over and over again, is the higher interest rates.

In 2005, the problem appeared to be more from the refinancing of homes. And it appeared to cluster around African American urban neighborhoods—which isn't to say that it wasn't spread around, but in terms of clustering, or the four leading neighborhoods with this issue, they were urban African American.

In 2007, we expected to see the same. And as we started tracking where the foreclosures were happening, we were startled, how the foreclosures had moved. The four leading neighborhoods were suburban neighborhoods, three of which are predominantly white, and one of which is racially mixed. That is not to say, that the urban African American neighborhoods weren't disproportionately affected; but in just the sheer numbers, they were no longer the leading neighborhoods. It was suburban America that was being affected. And that's why we actually decided to go back and look at all the court files.

Now, in 2007, it's always what was filed [foreclosures]. In 2005, it was always based on orders for sale. But still, the numbers are so large, that they're still very good numbers.

When you ask about what caused it: Well, we do know, that in 2005, about 24% of foreclosures involved adjustable rate mortgages; but in 2007, it's 46% that involved adjustable rate mortgages.

In addition to looking at almost 1,700 filings, we also conducted in-depth interviews—with only 26; but 26 people who self-identified. We invited people from neighborhoods, because we wanted to make sure we got urban and suburban, white and African American neighborhoods. We invited anyone with a foreclosure in those areas to come and interview with us; and 26 people did, so they self-identified.

They are as demographically mixed as you could possibly have wanted them to be, even though we didn't deliberately select the 26.

Q. Before you get into the in-depth study of the 26; on the broader picture, 2004 to now: Was there a major factor—people losing jobs? I know there is still a big Ford auto plant there, shrinking, closing down. Or is it a drop in prices? Or mortgage practices?

A. I have to cite the 26, because those were the only people I could ask. Out of the 26, eleven identified medical expenses, or health issues, as contributing to foreclosures. Six said the housing costs were too high for the household's income; six had either home maintenance, or other expenses, other than home maintainence, that were unexpected; nine had "change in employment status" as the cause; six said, "Deceptive or otherwise fraudulent lending practices."

On of the other things that startled us, was that when we interviewed the 26—and this was regardless of whether they were fixed rate, or adjustable rate, or where they were—we were surprised to find that 14 of the 26 had mortgage payments that did not include taxes and insurance. And almost every one of those 14 said that they didn't know that was going to be the case, until they were actually at the closing.

Q. And then this became a housing expense which they couldn't handle.

A. Exactly. And I have an instance of a higher-income person, which I could give you a pretty thorough example of it.

While we knew there were some practices like that, we had no idea that one of the largest common denominators was going to be, that people did not have, what most people consider the four elements of mortgage payment: principal, interest, taxes, and insurance. So, we feel that more research needs to be done on that issue, because that may be one of the most common denominators that exists.

That, and the fact that we see a median interest rate of over 8%—for the 1,700 [foreclosures]. So, we know that the interest rates are, in general, pretty high for the people who are experiencing foreclosure.

So, part of it is loss of jobs; part of it is just the generally high interest rates; part of it, is that there are expenses that we consider the normal part of a mortgage payment, that have to be made outside it.

We have one person: She's a person with a house worth $235,000. We interviewed people—you know, we wanted to get a cross-section. She had two mortgages: one, with an adjustable, 8.5% ARM—and that interest rate would have gone up in May 2008; she also had a second mortgage [for refinancing?], that had a fixed rate of 12.75%. And she did not have taxes and insurance in that payment; so she had an additional $268/month, outside of the mortgage payments, to cover taxes and insurance.

Q. Were most of the people in your study, borrowing to buy the house, or borrowing to refinance for other expenditures?

A. It would be more split. Like I said, in 2005, we saw that it was predominantly refinance; but you're seeing it now, much more evenly split, including purchasing—the initial purchase of the home—rather than refinance.

Q. Did most of these people have more than one mortgage on the house, like the woman you were just speaking of?

A. We actually know that. We can give you the breakdown. [Discussion of its being emailed].

We know, for instance—which you could intuit—that in fixed-rate, the average interest rate was 7.49%; in the adjustable rate, it was 8.65%, the average interest rate. We know that 46% were adjustable, 54% were fixed. We also know that with prepayment penalties—where there was a prepayment penalty in addition, as an element of the mortgage—that the average interest rate was 9.02%.

We know that prepayment penalties attach to adjustable-rate mortgages. About two-thirds of the times we saw the prepayment penalty element, we also saw that it was an adjustable-rate mortgage.

Q. Can you compare that to 2004 or 2005?

A. In 2007, 54% [of those being foreclosed] were fixed-rate mortgages, and 46% were ARMs. In 2005, 71% were fixed-rate, and 27% were adjustable rate. The small difference, is just where information was not available.

The majority of loans in 2007 were newer loans; 70.75% were less than five years old. There's a big clustering of loans issued in 2006, 2005, 2004. And that was true also in 2005; some 78% were less than five years old.

In 2005, the median interest rate for all [foreclosure] cases was 8.2%. The average fixed-rate interest was 8%.

Q. Do you know, of that eightfold growth in foreclosures, to 3,200, in the last decade, how much of that increase is within the last few years?

A. I can tell you, year by year, how many. Orders for sale: 1996, 437. In 2007, the precise number is 3,187. Starting in 2002, we had 1,262, there was growth all along the way, leading to 2007. In 2003, it was 2,161, so there was a huge leap. And 2004 was 2,610. 2005 levelled off just a little, 2,508. 2006 was 2,710. And 2007 was 3,187. So the banner years, if I may use that ironically, are between 2002 and 2003, a huge increase; and then 2003 to 2004, went up by almost 500; and then in 2006 to 2007, it's gone up dramatically.

Q. Had most of these people taken these mortgages recently?

A. Well, we know that with ARMs, that the failures came early on in owning the home, or having the loan. And with adjustable-rate mortgages, people fail much earlier on, in the process.

The time period between acquiring property and defaulting on loan: This is just for 2007. If it was under a year, it was 12.75% of all the loans [defaulted]. And the adjustable rates were... [to send by email, and 2005 "by hand"].

Q. But those various interest rates that you spoke of, are all—including the median for all of them—pretty high. Are they markedly higher than they were in '04 and '05.

A. I know that, but I don't have it right at hand. [Discussion of emailing that].

Q. Do you have an idea, how many of these people who had the ARMs, actually could have qualified for fixed-rate?

A. No, there's no way we could have known that.

Q. You were, earlier, going to describe them more. Can you tell me more about who they are?

A. The 26. There were all geographically spread. We had three people who had condominiums. They had a range of incomes. There were no Hispanics, but they were spread between white and African American.

Q. Are there "common denominator" lenders?

A. We don't know the lenders, we know the plaintiffs [in the foreclosure].

Q. Which may be the repurchaser of the mortgage or security.

A. Yes. So, we don't say we know the lenders, we know the plaintiffs.

The median sales price in Louisville is $139,750—here's the "apple" again. We looked at property valuation of the 2007 foreclosures on properties, and we found that 72% had assessed value—that's the "orange"—below that amount. While we know that assessed value, typically, is lower than sales value—or, it has been; no telling now, because sales [price] in Louisville only went up by 0.9%. I know the rest of the country has dipped. We didn't dip, but going up by 0.9% is definitely far less than how it used to go up. So, assessed may not be so far off. But, that says 72% of foreclosures were on homes that had a value below the median sales price. 77% had a value below $150,000. Basically, even adjusting—which I can't do scientifically—but even saying, OK, assessed value as a whole is off by 10%, or even 20%, what we know is, that this is worker housing; this is workforce housing that we're losing. And I think that's very important.

The example I gave you, was a home that cost over $200,000; and that is a group of people who are being affected, in numbers and percentage, in a way they haven't been before, because they're over 20% of what's happening. But we tend to focus on them, and miss the point, that who is being dispossessed, are really workforce housing.

Q. What's happening to neighborhoods there? Do you see an impact from this?

A. The answer is, that I'm not qualified to tell you. But we believe that there is, and will be, an impact on neighborhoods. And one of our very strong recommendations is that we have to have neighborhood discussions, about what will happen to a neighborhood where they're experiencing an increase in the number of homes that have foreclosures, as they get boarded up. We don't know what the tipping point is here.

Interestingly enough, I would say we missed the boat in 2005, when we were looking at the leading neighborhoods being urban, African American. It's almost like we said, "Oh, we don't expect more from those neighborhoods"; but we have no idea how foreclosures may have impacted the ability of some of these neighborhoods to experience revitalization. We just weren't thinking that way. And I didn't come out and say, "Foreclosures are the main reason that there may be some of the issues of unemployment and crime in an area, as things get boarded up, and people become more isolated. So we may have already seen it happen in our neighborhoods, and not realized that that was one of the causes.

Q. I wonder if you saw Congressional testimony, and Washington Post articles, by the Treasurer of Cleveland, of Cuyahoga County, Ohio—his name is Rokakis—where he identified a neighborhood in the west of the city, that was just disintegrating.

A. Oh, yes, Slavic Village, where people are looting, and— I can't point to anything like that here. As I said, we may have missed the boat, in knowing the role that the foreclosures have played in our more fragile neighborhoods. Because people weren't as alarmed when it was happening in only the fragile neighborhoods! I have to say, one of the things that is getting people's attention, is the fact that it is attacking suburban America, and people that we thought were solidly fixed with homeownership. So, finally we're paying some attention to it. But it's been a crisis here, you realize, for several years.

Q. In addition to the studies that you're doing, you're also trying to help these people avoid foreclosure, is that right?

A. Well, we do not provide direct service. But one of the things we found in doing our study, was that when we talked to the 26 families, we came with referrals to direct service agencies. And a substantial number of the 26 households took advantage of one or more of the services. There is an as-yet-to-be-defined foreclosure intervention assistance program by our city. They actually set aside money to help. And 11 of those 26 are on the waiting list for that. We have them working with attorneys at Legal Aid, which is our legal services organization. We have hooked people up with foreclosure counselling programs at a Neighborworks affiliate here in Louisville. We even got people into volunteer income-tax assistance, where you can have your taxes prepared for free.

What we found, is when you bring an intelligent explanation of services to people, that they will take advantage of them.

Q. I think you also said that the state legislature was starting hearings. What is the purpose of them?

A. Well, in Kentucky, despite all of the press that this has been a problem for years, we are at the point where we were happy to convince the Joint Banking and Insurance Committee that, in fact, there is a problem that requires some state attention. The reforms that were proposed years ago, that could have prevented some of this, were rejected, and people did not think there was a problem. Well, now the horse is out of the barn; and we still want to close the door, because there are other horses in the barn; but we're at the stage of even convincing the legislature that there is a problem that needs state attention. I think all the national attention is helping to have that happen. But I was pleased that some of the information of our study got people's attention, simply by the numbers. No one had presented them the numbers before, in a way that they could see the impact, at least on the city.

Q. Are they preparing a hearing where you're going to testify? Or are they considering specific measures?

A. They had a first hearing, and a very able advocate spoke about helping to protect consumers currently in crisis, and preventing practices that would lead future consumers, borrowers, into loans that they couldn't afford.

Q. And could I ask you in general, in terms of what you have seen, whether anything is being done on the Federal level which can stop these foreclosures?

A. So far there is very little being done to help those people who have gotten into loans that they can't afford, or in providing relief. We have proposals right now. So, until we have actual legislation that passed, I really can't tell what the impact will be nationally.

At the state level, the fact that so much national attention is being paid—and I will say, finally—to the borrower; because we did have a lot of national attention, but it was about investors who had purchased these bundled mortgages, and about the banks. We are only recently looking at the human misery that has been caused by these lending practices.

And I will say, that it is the lending practices that have caused this human misery. To pretend that a rogue band of teacher's aides, and gas station attendants, and retail salespeople pulled the wool over lenders, ratings agencies, investors—I'd like to think we have that much cleverness and focus! But the truth is, it's the lending industry that changed. The lending industry has decades of a history of very responsible lending. They can't turn their back on that, and say that they don't know how to do it correctly.

It's the lending industry. And by that, I include the brokers, the appraisers, as well as the rating agencies and the investors. They're all part of this. And those practices—for instance: We know that people (I don't even have to get into whether fraud was a part of it), that when people go to a closing, they don't know what they're getting into. Whether it's deliberate or incidental, that these elements were not explained in a way that they knew what was happening. And requirements of the past did not contemplate a closing where a family of a teacher and a retail salesperson, going to a closing, has to understand adjustable rates, and prepayment penalties, and balloon payments, and that not every element of the loan, taxes, and insurance is even going to be included.

And they don't understand what a yield-spread premium is [when a mortgage broker has been paid by a lender to sell a loan with the highest possible interest rate, to someone buying or refinancing a home—ed.], and are they truly getting value for paying a higher interest rate that would give a broker a yield-spread premium? The requirements of explaining a loan didn't assume that all of this would happen.

In fact, the industry itself threw up its hands, in despair of understanding the mortgages, when they called them "exotic" mortgage products. It was basically saying, "We don't understand everything that's going on." And yet, people are blaming borrowers, as if the borrowers have changed, rather than the lending practices.

Q. You know, there is a double investigation of the major investment banks now, both by the New York State Attorney General, Andrew Cuomo, and by the SEC, investigating the same banks. And what they say they're finding, is that these banks were dumping and shorting—for their own accounts—the same mortgage securities that they were, at the same time, hyping and selling internationally. They were selling them off their own accounts, and those that they retained ownership of, they were shorting, hedging against, at the same time as they were very aggressively—beginning in early 2006, in the case of some of these banks—that they were already getting rid of this crap themselves, and at the same time selling it internationally. They have one memo from Morgan Stanley to the first big lender that went bankrupt, First Century, in which they say, "Please continue to give us $2 billion a month of this product" because they were selling on, $2 billion a month, and more with leverage. And Morgan Stanley, like the others, was divesting itself of this kind of stuff, and knew exactly what was going to happen to it.

A. Well, I'm not able to comment on that at all. That wasn't part of our study!

I say, it's the lending industry that changed, not the borrowers. And people are focussing on borrowers as bad actors, when, really, the loans became so Byzantine, that we didn't have a cultural experience of these loans before. So no one could really explain them to people. For instance: When my parents purchased a home and got a mortgage, they would never have encountered this, and they would never have been able to bring their expertise and life experience in a way that would be useful for this experience.

These are new practices, and people trusted an industry with an incredibly solid and responsible track record. Countless people have said to me, "I didn't think they would lend me the money if I couldn't pay it back." And yet, we see that there were compelling reasons that, in fact, people were lent money that any reasonable assessment would have shown, these people would not be expected over the long haul to be able to pay back. Adjustable-rate mortgages: They use this "teaser rate" as the rate that the ratio [of homeownership expense to income] was based on, as if people would always be paying that rate. When in fact, in a relatively short time, the interest rate was going to go up, and the payments were going to go up. And yet, there was no national experience, people didn't think it would go up that much in that short a time.

So, it was the lending practices, rather than the borrowers, who changed. If anything, the borrowers had less resources to fall upon, to understand these kinds of loans, because they were new forms of loans.

Q. Was there, in terms of who owned the mortgages and was doing the foreclosing in your area, did you see patterns—like in Cleveland, it would seem to be heavily Deutschebank.

A. We certainly have lenders who, you know—we certainly saw in the plaintiffs, that there was some clustering in that; but it was surprisingly spread out, I will say. But yeah, Wells Fargo, Deutschebank, they were leading plaintiffs. But we did see it spread out. It's not like there was a clustering that was so startling, or so high, that we know, "that's the culprit." It didn't shake out quite like that.

Servicing is a major culprit in foreclosures rising. Whatever the head of the bank says, or the lending institution, the servicing component has not gotten the message.

We still have people telling us, that servicers won't work with them until they're 120 days in arrears. We have people all the time who are put on "terminal hold." We do not have effective servicing to avoid these foreclosures.

I can say that I worked with one of the people we interviewed. And she had gotten the money together to pay. And still could not make headway with the servicing department.

I also think that a careful review of the extra charges, because I think people agree to charges—they don't know what they're agreeing to)—but they do agree to some charges; once you fall behind, there are all kinds of charges.

And I think that with some of those, it is possible in some instances, that when the paper got passed along, new policies came into play; but they weren't the charges that the person had originally agreed to, or theoretically agreed to. So I think a careful review of extra charges is something that would help borrowers who are in default. I'm not saying they were intelligently agreeing to them, but they did have certain charges that were part of the mortgage. But those mortgages get sold, and new policies intervene, and I think they are not usually to the borrower's interest, and that there may be some excessive charges.

But also, there is not the sense of urgency, in the servicing, that they should be doing everything they can to avoid the foreclosure.

And that, we saw, through all the 26 people, [[they got charges for an average of $1,699—?? (almost inaudible)]].

Q. There are these cases now, in Federal court in Ohio, where evidently, the judges aren't satisfied that the foreclosers could even prove that they owned the loan.

A. That I also can't comment upon. But I have, in the course of life, have seen that. I used to work with legal clerks. So yeah, having to prove that they owned them—well, we'll see what the judges have to say about that. We don't know that that's happening [here]; we just know who's the plaintiff. So, some of these things I can't comment on. They're outside what we know about.

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