Text size:

Freezing introductory rates could have long-term effects

BY ELLEN YAN AND TIM ROBERTSON | ellen.yan@newsday.com
tim.robertson@newsday.com

December 2, 2007

Keith and Kari Sessa outside their South Huntington home. (Newsday / Ken Sawchuk)

After buying her childhood home from her mother's estate, Kari Sessa and husband, Keith, were in danger of losing the Huntington Station house until the lender agreed to a two-year extension of the 6.1 percent teaser interest rate on their loan.

"If things improve, then we should get a nice track record of paying mortgages on time," said Sessa, 53, a defense contractor employee whose rate would have gone to 9.64 rate next year, adding $800 to the monthly $3,352 payments.

Freezing the lower, introductory rates is just the mortgage crisis fix being negotiated by the Bush administration on a bigger scale with banks and lenders, but some Long Islanders said the effort could have a wide-ranging impact far beyond today. It would relieve the short-term burden of current borrowers and keep some from losing their homes yet could also hurt future homeowners by making it harder to get loans.

An agreement is expected as early as this week, but officials have been mum on details, including the length of the potential freeze.

"You give them another six months, it's not going to help people afford debts they can't afford," said East Meadow management consultant Anthony Graziano, 51, who got an adjustable rate mortgage on his second house, in Ridge, where he'll retire one day.

Graziano said he can handle his interest-only loan, which has a 6.6 percent rate for five years, and he's an example of someone who won't fall under the proposed freeze.

A Bush-industry deal could be cut narrowly and not be the big fix some expect, critics said. The negotiations are aimed at troubled borrowers with subprime mortgages carrying teaser rates, which went as low as 1 percent for a year, and some subprime borrowers got regular rates.

Any deal will be too late for many, including those in pre-foreclosure status, local advocates for borrowers said. While many talk about saving and reaching out to borrowers, people go into default and have foreclosures on their credit records because of the time being taken to push through congressional bills and industry agreements, critics said.

"It's only a small step in the positive direction," said Bethany Marten, founder of the Baldwin-based Home Buyers' Resource Center, which has been helping borrowers in trouble. "For some of the people who haven't slipped under the water yet, maybe this is the answer. So much of the damage has already been done that it's hard to fix."

Marten said she thinks the extension would have to last at least two to three years to save borrowers.

That could be enough time for the credit market to loosen, she explained, and for homeowners to go with their original plans to refinance once the adjustable rates set. Less than 20 percent of borrowers with adjustable rate mortgages would be able to pay the higher monthly payments once the rates reset, she estimated.

This year in New York, more than 30 percent of subprime, adjustable mortgage loans will have seen new interest rates for the first time, with approximately 25 percent re-setting next year, according to the state Banking Department. Many loans that originated last year will go from 8.4 percent to 11.4 percent, according to state figures.

Michael McHugh, chief executive of Continental Home Loans, a Melville-based mortgage banker, said extending introductory rates could have a disastrous, domino effect: First, it would deter investors, already shaky from the subprime collapse, from investing in the mortgage markets, especially if their expected returns are suddenly cut. That probably would further tighten credit lending. Borrowers hoping to refinance when their loan rates reset could have a tough time getting deals. New borrowers might have to hunt harder to get loans.

"I understand the idea," said McHugh, vice president of the Empire State Mortgage Bankers Association. "But there are repercussions. It's not as simple as it sounds."

For the Sessas, who won't have to face higher rates just yet, the new deal with their primary lender will slightly alleviate the strain on efforts to save money. The couple had gotten an adjustable rate on a $374,185 loan and borrowed another $99,000 with a 10.6 percent fixed rate to pay for their home.

Negotiations with the primary lender took more than a year before the breakthrough came a few days ago. Sessa said she's not sure if she'll be able to refinance before the rate resets in two years.

But she's grateful and said the Bush administration's proposed teaser rate extension would definitely help other struggling homeowners.

"It's progress," Sessa said, "and a lot of political tugs and pulls."