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Adjustable mortgage rates drive some to bankruptcy

October 28, 2007|By ARNOLD S. PLATOU

Editor's note: This is one in an occasional series of stories about the local housing market and what's happening to residents as they grapple with rising interest rates, tightening credit, falling home prices and other economic issues.

WASHINGTON COUNTY - When Donald Shumaker II refinanced his home in 2004, he knew the interest rate would stay the same for three years, after which it would become adjustable.

But he didn't expect what happened.

"I was paying $910 a month," he said, standing on the porch of his home east of Hagerstown.

In one month, the rate went from 7 1/4 percent to 10 1/4 percent, or $1,375 a month.

"Then, they sent me another letter, and my mortgage went up to $1,540," Schumaker said.

It was much more than he could afford.

"I'd have to have three jobs and no time with my family," he said.

Last Tuesday, less than 24 hours before his home was to be sold in a foreclosure auction on the steps of the Washington County Courthouse, Shumaker's attorney filed on his behalf for bankruptcy protection.

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"I guess it's my only option," Shumaker said. "I'm just going to have to go under, and that's a sad thing to say."

He isn't alone, judging by the number of foreclosure notices carpeting the back pages of The Herald-Mail newspapers the past several months.

In the past 12 months, a total of 516 foreclosure notices have been filed at the courthouse. By comparison, 294 were filed during the same period in 2005 through 2006.

"I'm seeing a significant increase. I've never seen it this bad. I've been doing it over 30 years," said William O'Brien, a Martinsburg, W.Va., attorney who handles such cases in West Virginia and Maryland. The number of resulting bankruptcies is "going completely crazy," he said.

A major problem, several attorneys and a local mortgage broker agreed, is that, like Shumaker, many borrowers don't know what is in the loan agreements they sign.

Those agreements are "18 to 20 pages long, typically ... but nobody reads that stuff," said a local mortgage broker, who didn't want to be identified.

On the dotted line

Shumaker, 35, bought the 634 Antietam Drive house on a half-acre lot in 2000 for $76,500.

A year or so later, tornado-like winds knocked trees down onto the roof. Insurance paid for the damage, and Shumaker, who does asphalt paving for a local contractor, decided to borrow more money to remodel the inside and to put in a driveway on either side of the house and a sidewalk.

He returned to the Hagerstown company that held the first mortgage and increased the loan to about $156,000, according to deed records at the courthouse. That, Shumaker recalls, increased his monthly payments from $714 to $910.

Over the next few years, records show, the loan was sold as an investment from one lender to another and another across the country.

Early in 2004, Shumaker called one of the lenders who had been filling his mailbox with refinancing offers. The California-based company sent a representative to the house.

Sitting in his living room last week, Shumaker said the man told him the interest rate would be fixed at 7.25 percent for three years, then would go to an adjustable rate.

"He said when that happened, it was tied to some index ... it would go about a quarter of a percent up or a quarter of a percent down," he said.

Shumaker accepted the 19-page agreement.

The principal was $151,000.

Rate increase

For the next three years, Shumaker said, he sent off $910 every month. Late this past spring, he said, he received a letter from another lender, one that apparently had bought his loan.

Shumaker said the letter informed him that the next month, his interest rate would jump to 10.25 percent, increasing his monthly payment to $1,375.19.

Stunned, Shumaker said, he called the company, EMC Mortgage Corp., which is based in Texas, but failed to convince the company to lower the payment.

He made the first month's payment, but he said he was late the next month and had to pay a total of $1,443.95, which included a late fee.

"I called them. I said, 'I don't want to lose my house,'" he said.

He said he asked that the payment be dropped back to $910 and that he pay over a longer period. The company's representatives refused.

By then, he said, he was late paying again. He said EMC's only offer was to give him a couple of weeks more to get the payments current, plus pay late fees. It was about $4,000 in all - impossible for him to raise so quickly, Shumaker said.

Asked this week about what happened, EMC had no immediate comment.

Debbie Krznarich, vice president of communications, said Tuesday she would check into Shumaker's case and she or someone else would call a reporter back. No one did and she did not return other calls on Friday.

Spelled out

According to deed records at the courthouse, Shumaker should have known what he was getting himself into.

On Feb. 27, 2004, he signed or initialed all 19 pages of the document to refinance his mortgage with the California-based lender.

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