Melvin B. Miller
Editor & Publisher

The end of a dream

The American dream is to own your own home. But for many, that dream has become a nightmare. Rising interest rates have made it impossible for some families to continue to afford the cost of homeownership.

What happened? Unusually low interest rates triggered a housing boom between 1999 and 2004. Mortgage loan rates were very affordable. Demand for homes pushed up prices, so early homebuyers saw an immediate appreciation in the value of their real estate.

Aggressive lenders marketed two practices that fed the rise in costs. Homeowners were encouraged to make home equity loans to pay off high interest credit card debt. Lenders also began to extend mortgage loans to borrowers with subpar credit. The rationale was that the rising prices of real estate would provide sufficient equity to recover the amount of the loan if the borrower defaulted.

There was one element in the practice that would eventually lead to a doomsday — the adjustable rate mortgage (ARM). The conventional home mortgage was a 30-year loan with a fixed interest rate. Borrowers with the means to pay off their mortgage faster could choose a 15- or 20-year loan. The significant point is that the interest rate was fixed. Consequently, the borrower knew when he made the loan that he could afford payments at his level of income at the time.

When interest rates were at rock bottom, it was possible to get a 30-year ARM for $200,000 at the rate of only 3.5 percent. Debt service would come to only $898.08 per month. However, a few adjustments could quickly bring the rate to 7.5 percent, or $1,398.42 per month. That is a monthly increase of $500.

As a result of the increase in ARMs, 27.1 percent of Boston homeowners spent more than half of their gross income in 2004 on housing. In addition to debt service, this would include taxes, utilities and insurance. This is more than double the national rate of 11.7 percent. Only Miami, with a rate of 35.8 percent, was higher. A rate of 30 percent of income spent for housing is considered to be acceptable by strict banking standards.

Last year there were 60 foreclosures in Boston, with the majority in black and poor neighborhoods. The city’s Department of Neighborhood Development expects that number to rise to 240 this year. Such a dramatic loss of property will have a harmful impact on African American neighborhoods, which are already struggling with a number of sociologically upsetting problems.

Unfortunately, some unscrupulous subprime lenders have taken advantage of the lack of financial sophistication of some community residents and induced them to sign on the dotted line. It is the responsibility of the borrower to seek professional help before making such a huge commitment. Those who failed to do so may find themselves in financial difficulty.

Nonetheless, Mayor Thomas M. Menino has stepped up to provide assistance for homeowners who are now facing foreclosure. He has organized some banks and mortgage companies to step into the breach to assist homeowners in default. And he has raised funds to enable the city’s Home Center on School Street and other agencies to provide counseling assistance.