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ARM Interest Raise May Lead to Foreclosures

See Also: Foreclosure Webliography

Berlin Johnson's first home was supposed to bring this single mom and Desert Storm vet stability and peace. But she missed a payment. When she tried to dig her way out of her mistake, she learned something about the mortgage on her Cleveland Heights home that shocked her. Next month, her interest rate is going up from just over 5% to 9.99%. Add on the penalties and fees from her late payment and Johnson's mortgage bill is going from $875 to $2,300 a month for the next seven months.

Berlin Johnson: It's very painful because that's like what, over half of my income per month? And that's not even considering my car note, insurance, and my daughter being in school.

Johnson is one of thousands of borrowers across Northeast Ohio who took advantage of home loans that promised low payments up front, but higher rates down the road. Adjustable rate mortgages, or ARMs, helped put first-time buyers, like Johnson, into homes they might not have otherwise been able to afford. But now many of those loans are coming due and kicking in with higher rates. Those with good enough credit are getting out. Julie Joseforsky heads KeyBank's mortgage division.

Julie Joseforsky: We see a lot of the refinance activity coming in as a result of clients wanting to get out of their ARM products and clients looking to either fix those of look for more traditional mortgage products at a fixed rate.

High prepayment penalties and Northeast Ohio's slow housing market limit options for many wrestling with rising payments. Mark Seifert counsels borrowers at the East Side Organizing Project. His fastest growing group of clients comes from Cleveland's wealthier suburbs.

Mark Seifert: These are the middle and upper income folks in places like Bay Village that are starting to come to us saying, 'My God, I thought my house would appreciate and I could refinance or sell and get the equity out.' But that's not what's happening.

The Mortgage Bankers Association says Ohio leads the nation in the number of adjustable rate mortgages - both prime and subprime - in foreclosure. And more and more Ohio borrowers in these loans are late on their payments. Corena Gamble-Larimer is at the Home Repair Resource Center. She worries resetting ARMs will lead to more foreclosures in Cuyahoga County.

Corena Gamble-Larimer: We're seeing it everywhere, and it brings down housing values. If a house on the street next to yours goes through foreclosure and is vacant for three years that effects that whole street, that effects your street, that effects your house and your house's value.

A pilot program starting next week aims to help some in adjustable rate mortgages. The East Side Organizing Project will educate and even renegotiate lower rates for nearly 500 Cleveland-area clients of Ocwen Financial. Ocwen's Bill Reinhart says working with borrowers makes financial sense for his Florida company. Ocwen gets a fee to handle loans for Wall Street investors, money that would be lost if the loan goes bad.

Bill Reinhart: The investor that does own the loan in 97 out of a 100 cases is going to lose money if we foreclose. Certainly it's a bad outcome for the owner and it's a bad outcome for Ocwen.

But not all in the mortgage industry are as ready to cut their losses in the face of foreclosure. HomEq Servicing handles Cleveland Heights homeowner Berlin Johnson's mortgage. A spokeswoman said HomEq doesn't comment on any borrower's file. Johnson says if she was buying her home today, she'd do it differently.

Berlin Johnson: More research, More questions, and (sigh) have someone that's known in the community look at it before signing. Even if you have to pay someone its worth it.

To get back on track, Johnson says she doesn't have much choice. She can't afford her new payments so she's considering filing for bankruptcy or trying to sell her home. I'm Mhari Saito, 90.3.