Sub-prime loans, as the term implies, are made to those who have bad credit. By some accounts about 20 percent of U.S. mortgages are made to such borrowers, frequently with little documentation of ability to pay. On average these loans are bareley worth 95% of the home’s value, meaning there is very little equity in the property when the loan is issued and even less if the real estate market slumps.
Typically, the loans feature low “teaser” rates for the early years of the mortgage and then are re-set to higher rates later. Oft times the higher rates are what push the borrowers into foreclosure if not bankruptcy. While news of the fallout from those lending practices has begun to dominate business pages, there are Iowans who have been saying for years the loans are home wreckers.
Narrator: In recent years, an increasing number of families are at risk of losing their homes to foreclosure.
Sherry Strasser: We loved our house when we first bought it; it's turned into a complete nightmare. They threatened foreclosure. Its stress day in and day out, it never goes away.
Narrator: The Strassers may have been the tip of a disturbing trend.
Senator Chris Dodd: Now we’ve had the largest number of foreclosures in the fifty-five years we’ve kept records.
Narrator: Senate banking committee chairman Chris Dodd, talks about some of the toxic ingredients in what has become a global financial crisis.
Senator Chris Dodd: You had brokers going out and luring people into deals with teaser rates that they knew were going to escalate, that the people they were convincing to take them were never going to be able to meet those obligations, given their incomes. They were lying about incomes, lying about documentation and as a result, maybe as many as three million people in this country over the next two years are going to be faced with foreclosure.
Narrator: Foreclosure rates continue to climb as property values plummet, some estimate by more than a trillion dollars. Nationwide, the foreclosure rate was one foreclosure filing for every 134 households, during the first half of 2007. In Iowa the rate was one foreclosure filing for every 407 households.
Danny Wagener: There's going to be a lot of families faced with some tough decisions about are they going to be able to save their home and if not where are they going to go.
Narrator: Danny Wagener is a community organizer for Iowa Citizens for Community Improvement of Des Moines.
Danny Wagener: It doesn't just affect the families that are in foreclosure. It affects all of our neighborhoods. As we see more foreclosures we're going to see more vacant properties which is going to decrease home values. It's going to basically destabilize neighborhoods. It's going to hurt a lot of people and a lot of communities. The bottom line is when you have a lot of homeownership in a neighborhood, it's more stable and it's more likely to grow and increase the economic base through tax revenue and when you have a large number of foreclosures and a large number of vacant properties you're going to have less stable neighborhoods and that's not good for any community.
The Attorney General's Office urges Iowans to call the Iowa Mortgage Foreclosure Hotline if they are at risk of losing their home to foreclosure, or if they can't make payments. For more information visit the Iowa Department of Justice Office of the Attorney General's Web site.