Alicia Emerson always dreamed about owning her own home. But what she bought was a house of cards.
Looking back on her experience, Emerson realizes she was too trusting of promises made by the Minnesota-based mortgage company that approved a $248,000 loan for her and her boyfriend even though their joint income was less than $50,000 a year. Now she gets it - she signed up for a subprime mortgage.
"They told us we could refinance when the construction was finished with a negative amortization mortgage, which would make our payments between $800 and $900 a month," says Emerson, a former medical transcriptionist for University Hospital and Clinics. "But when the time came, they told us that kind of loan was no longer available, and our payments were going to be $1,700 a month. There was no way we could afford that."
The hot housing market fueled an explosion of high-risk subprime mortgage loans. People with no down payment and an income too low to qualify for a standard "prime" mortgage found they could get a home loan with a low introductory interest rate and the promise that they could refinance when that rate expired.
Underlying this whole scheme was the assumption that the housing boom would never end and houses would continue to increase in value. It was a bad bet.
Last year, many subprime borrowers discovered they couldn't refinance because their houses had lost value, so now they owed more than their properties were worth. This caused a nationwide spike in foreclosures - nearly 1.3 million in 2007, an increase of 79% over 2006 - and added tremors to an already shaky economy.
Emerson and her boyfriend moved into their new Mount Horeb house in August 2006. Faced with payments they couldn't afford, they tried and failed to find a housemate. They also tried selling the house, and found they couldn't do that either. They were trying to refinance to a loan with lower payments when Alicia's boyfriend lost his job. She ended up taking out a new mortgage in her name alone, from a different lender, with payments of $1,100 a month. She also took out a second mortgage for $28,000 to help her catch up on other financial obligations.
Then, Emerson and her boyfriend spilt up. She was left with a house and a mortgage she could not afford.
"It was awful," she recalls. "I was living in the biggest mistake of my entire life, and I didn't know what to do about it."
According to the Dane County Housing Authority, 513 foreclosure sales were scheduled in 2007, up from 286 in 2006. Emerson's house wasn't one of them. Before a foreclosure sale was scheduled, her house was purchased from her mortgage company as a "short sale." She thinks the buyer got it for about $100,000 less than its market value.
AcQuity Property Investments, a company with offices in Wisconsin and Minnesota, arranged the short sale. AcQuity buys homes that are going into foreclosure and resells them to investors. In Madison, Lisa Peterson and her husband, Michael Meister, handle the company's acquisitions.
Peterson estimates that AcQuity currently has about 50 active transactions in the Madison area and finds 30 to 50 potential clients each week by reviewing court records.
"Our focus is on helping people who are having trouble with their mortgages," Peterson explains. "We help them avoid foreclosure and credit problems by selling their home quickly."
Three years ago, Peterson and her husband got into trouble with their own home payments after a publishing venture failed. They had to turn to family for help. The experience gave them an idea for a new business: help people protect their credit and avoid foreclosure, either by renegotiating their loans or buying and reselling their houses.
They launched their company, Alexander Property Investments, about 18 months ago. After about six months in business they teamed up with AcQuity, a Minnesota company that has been in business for about 12 years. Over the last year, she says the Madison office has purchased and sold about 10 Madison-area properties as short sales. Currently, it is working on purchasing another 41.
When it looks like clients might be able to renegotiate the terms of the mortgage, Peterson refers them to "Hope Now," a federal program designed to prevent foreclosures that includes a national hotline to mortgage counselors. But usually the situation is beyond such intervention; Peterson believes her company has made only two of these referrals in the Madison market.
The federal Department of Housing and Urban Development (HUD) certifies agencies that provide housing counseling to help people avoid foreclosure. It urges people who are in over their heads to work with one of these agencies.
AcQuity is not HUD-certified. But the Dane County Housing Authority and a nonprofit called Greenpath are.
Ellen Bernards, a certified consumer credit and housing counselor with Greenpath, says people facing foreclosure should be careful about doing business with companies that promise to "save your home from foreclosure," especially if they charge a fee up front.
"Unfortunately, when people are in crisis, they may look for the least painful way out," Bernards says. "And unfortunately there are always people who are willing to prey on them."
Bernards believes many lenders are much more willing to renegotiate the terms of loans now than they were when the crisis started a year ago because the lenders do not want to take the house and have to dump it at a loss.
Peterson agrees that consumers need to be careful and stresses that they should never have to pay someone just to contact the lender on their behalf. She says AcQuity never charges a fee for its services.
"We have been in their shoes, and we really do understand how hard it is to come back from something like this," she says. "We want people to know that it's okay to ask for help."
Alicia Emerson has moved to Georgia, where she hopes to make a fresh start. She feels grateful toward Peterson and AcQuity for helping her escape from a house that almost ruined her.
But her troubles are not quite over. Although the short sale satisfied the first mortgage, she still owes about $30,000 on the second mortgage. She's consulted with a bankruptcy lawyer to try to get that debt reduced, but she may have to declare bankruptcy.
One thing's for sure: Emerson has lost all interest in becoming a homeowner again. "After all that's happened," she says, "I've decided that renting is not so bad."
Making the connection
Dane County Housing Authority