Homeowner faces foreclosure after interest-only loan

Interest-only mortgages allowed people to buy more of a home than they could afford with a traditional loan. But some of those loans had adjustable interest rates and when the rates shifted up, that forced out a lot of homeowners who'd been just scraping by. KPCC's Susan Valot has this portrait of one homeowner who ended up with an interest-only loan and is facing foreclosure.

Susan Valot: All Albert Stephens wanted to do was add a bathroom and renovate the den in his house in Watts. He wanted a place where the kids from his church could hang out. He didn't have a specific lender in mind – but one day two years ago, his phone rang.

Albert Stephens: [laughs] They found me.

Valot: The mortgage broker told him he could refinance to pay for renovations. Three times, they came to his house to make the pitch. Stephens signed on for a $424,000 loan.

Stephens: I'm a person that, I deal with you on an equal basis. I figured I'm going to be fair with you. You be fair with me. You know. But I found out that ain't the way, that ain't the way they deal.

Valot: A few months after Stephens made the deal – when he finally read the small print – he discovered he'd taken out an interest-only mortgage. It included a huge penalty if he tried to pay the principal during the first two years.

Stephens: I didn't understand it. And it sounded like a good deal because "Oh, you're going to pay this and in two years you can turn it over" and, you know. OK. I can pay $2,400 a month. It ended up the last payments I made on that house, I was paying, I would say the last six months, I was paying over $3,000 a month.

Valot: Stephens gets a $3,700 retirement check each month. He tried to pay the mortgage and the rest of his living expenses out of that check as long as he could.

But he stopped making payments in September, shortly before his interest rate shot up to nearly 9 percent. Stephens says he'll never pay another dime on that interest-only loan – which means it won't be long before he loses his house.

Stephens: I tell it like this – according to them, I owe more than it's worth. But it's worth more than that to me.

I don't mind paying for the property, but right now I can't pay the note that's against it. I can't pay it. I'm almost to the point of giving up. I don't want to give up, but nobody's really giving me any help.

Valot: Albert Stephens spent a recent Saturday morning at Compton Community College, looking for help at a foreclosure prevention fair. He's trying to save his house by switching his interest-only home loan to a 30-year fixed mortgage.

At the foreclosure fair, Stephens talked to his lender in person – only to find out he's already filed the paperwork for a loan modification three times. He says he still hasn't gotten a response.

Stephens: If it was me by myself, I wouldn't even worry about it. But I got a wife, you know. And that bothers me. At least have something decent, you know, have a place for her, 'cause me, I can live on the street if I have to.

Valot: Los Angeles Neighborhood Housing Services put on the foreclosure prevention fair that Albert Stephens attended. The nonprofit group's Ester Cadavid says his is a familiar story.

Ester Cadavid: The big reason why people are defaulting on their mortgage is the loan product – bad loan products. I mean, period, the end. I don't know how people who make $20,000, $30,000 a year have a half-a-million-dollar mortgage.

And, you know, some of those stated-income loans that were misused and abused. In some cases, there was real estate fraud, truth-in-lending issues, absolutely, and greed all the way around, on the part of the lender, on the part of the investor, on the part of the consumer.

Valot: Cadavid estimates the average gap between the mortgage homebuyers could afford and what they actually got is $200,000. She says there's no rescue fund. The Watts neighborhood where Albert Stephens lives is proof – 8 out of every 10 homes on the market there are foreclosures.

>Stephens: I'm just dreading the day that they knock on the door and say, "You gotta go." I hope that don't happen. But, I mean, if I do, I'll just have to go 'cause I'm not going to fight it.

I'm 85 years old. I'm not going to fight something like this. I've lived good up until now. If I can't live good from now on, so be it.

Valot: Albert Stephens, a homeowner in Watts – for now.