Sharon Wright Jackson bought her first home in 2004. The mortgage payment was what she could afford, about $769.
She's not making any more money. But starting in November, her mortgage payment likely will be $933. After a two-year introductory period, her interest rate now adjusts every six months, and rates are rising.
"You get lulled into a financial comfort zone, and then the lullaby is over," said Jackson, who lives in northeast Mecklenburg County. She is now scraping for a solution and facing the loss of her home -- "My dream home," she says, with half a laugh.
"Everything I ever worked for has gone into that home."
For millions of Americans, the cost of home ownership is suddenly spiking because they hold adjustable-rate loans. A report released Tuesday warns many may be unable to afford the increase, particularly in low-income and minority neighborhoods where the loans are concentrated disproportionately. A resulting rise in foreclosures could set back recent gains in home ownership in those areas.
When interest rates scraped historic lows in 2003 and 2004, consumers seized the chance to buy or refinance. Many pushed payments even lower by signing up for introductory rates that lasted two or three years. The industry touted such loans as a way to borrow more money than customers could otherwise afford.
But the loans were simply agreements to pay less now and more later. In many cases, later is now here. The loans are adjusting for the first time. The Mortgage Bankers Association estimates $300 billion in mortgage loans will move to a higher rate this year, and an additional $1 trillion will rise for the first time in 2007.
Homeowners who can't afford the new payments will have to sell, or face foreclosure. Amid cooling demand for new homes, also a result of rising rates, experts fear foreclosure increasingly will be the only choice.
The "rate shock could mean a sharp increase in foreclosures in some of the urban and minority communities that most need to build wealth through home ownership," said Maude Heard, president of the group that issued the study, the Association of Community Organizations for Reform Now, which advocates for lower-income Americans.
The ACORN report found blacks and Hispanics have relied disproportionately on adjustable-rate loans, often because they lacked access to traditional loans with fixed interest rates. It calls on federal banking regulators to require lenders to ensure that customers will be able to afford loans even after the rate adjusts. Such a rule is under consideration.
The states facing the greatest risk of increased foreclosures are in regions with economic problems: the Rust Belt, the Deep South. Also in danger are areas where property values have skyrocketed: California, Florida, etc. But even in the Carolinas, where the economy is relatively strong and home prices are relatively flat, there is trouble in some communities.
The Observer reported in January that foreclosures in Mecklenburg County have reached a record level, largely because of aggressive lending -- including adjustable-rate loans -- in lower-income neighborhoods.
The ACORN report looked at the price of loans made in 2005 by 15 of the nation's largest mortgage companies. It found that cities in the Carolinas had some of the nation's sharpest racial disparities across all kinds of mortgage loans: White borrowers tended to get low interest rates, while black borrowers received much higher rates.
An Observer series last year based on 2004 lending data reached similar conclusions.
Jackson, who is black, lives near the edge of Mecklenburg County, in an area where many minorities are purchasing homes, often in subdivisions marketed to first-time buyers. Jackson, 37 at the time, had a good job and an MBA, but she had never owned a home.
She approached the purchase with caution. She took classes from the Neighborhood Assistance Corporation of America. She found a place she liked at a price she could afford, about $149,000. She sought quotes from multiple lenders.
"I felt I had educated myself and I was prepared," she said. She knew the interest rate would adjust, but she wasn't worried. "I was thinking, `I'm college-educated, I've got a great job, it's going to be fine.' "
The loan was arranged by a mortgage broker and made by Aames Funding Corp. It carried an interest rate of 6.73 for the first two years, then it could adjust every six months to a maximum of 12.73 percent. It could never drop below 6.73. And because of the way the formula was calculated, the rate was almost certain to climb as soon as the two years ended.
Jackson's rate increased by the maximum 1 percentage point on May 1. Unless rates drop precipitously, it will increase by another 1 percentage point Nov. 1.
It would probably rise again on May 1, 2007 -- but only if Jackson is still trying to hold on.
