Last modified: Tuesday, February 6, 2007 12:12 AM EST Many face peril after risky loans BY RICK FOSTER SUN CHRONICLE STAFF For years, low- and moderate-income buyers struggled against steeply rising real estate prices in their pursuit of the American Dream of home ownership. But now that the lull in real estate sales is actually slowing price inflation, an increasing number of homeowners who managed to buy using risky, no-down-payment mortgages are seeing their dreams turn to nightmares. Mortgage counselors say some buyers who took out big loans with low initial rates or interest-only payments are now facing disaster as costly interest rate adjustments kick in. With price appreciation slowed to a crawl, selling the house to satisfy the mortgage often isn't an option. "A lot of people who bought homes in the past two years are getting into trouble," said Chris Newbury of Attleboro with New England Power Mortgage. He lays much of the blame on "creative" mortgages whose rates increase over time or which may require periodic balloon payments amounting to thousands of dollars. "Buyers with little equity built up get trapped," Newbury said. "They can't get out of it." Increasingly, the result is foreclosure. And the bodies of distressed homeowners who have fallen on their checkbooks are beginning to pile up. The number of foreclosure petitions filed against residential mortgage-holders in 2006 in Massachusetts rocketed up 70 percent last year, and the number of homes that actually went through to the foreclosure auction stage increased 46 percent, according to The Warren Group, publishers of Banker & Tradesman. Mortgage lenders filed 18,926 petitions to foreclose in Massachusetts Land Court last year, compared with 11,155 in 2005, and lenders announced 6,729 foreclosure auctions in 2006, compared with 4,620 in 2005. Petitions to foreclose are the first step in the foreclosure process, and do not always end in actual foreclosure. Some homeowners eventually sell their homes or refinance. In the Attleboro area, increases in foreclosures paralleled the statewide trend. In Attleboro, the number of foreclosure petitions jumped 69 percent over 2005, while the number of homes advertised for foreclosure auctions increased 25 percent. Taunton saw an 87 percent rise in foreclosure petitions and a 132 percent hike in the number of auctions. While many of the victims probably were over-extended to begin with, a slowing real estate market also is a major factor, said Timothy Warren Jr., CEO of The Warren Group. "The median sale price for a single-family home declined by nearly 6 percent last year. As housing prices decline, people who had borrowed 90, 95 or even 100 percent of the value of their homes now find themselves owing more than their homes are worth," Warren said. "If those people have trouble making their mortgage payments and can't sell the home for a price higher than the outstanding loan balance, then foreclosure is a real possibility." Observers of the lending market say lack of education among home buyers and "bargain" mortgages that include the potential for steep interest adjustments have been major contributors to the increase in the number of residential properties. "A lot of people don't read the fine print," said Mary Ellen Rochette of Taunton-based Pro Home, which provides borrower education and foreclosure assistance to area homeowners. Often, homeowners who take out "interest only" mortgages or packages featuring ultra-low starting rates find that after a specified term their interest rate can escalate as high as 20 percent. In one case, Rochette said, a homeowner sought counseling after receiving a lender's demand for a "balloon" payment of more than $38,000. Alternatives to too-good-to-be true mortgages that cater to low- and moderate-income buyers are available, if somewhat limited. Some lenders are touting a new family of products from the Freddie Mac, a leading secondary mortgage lender, as an alternative to risky mortgage schemes for qualifying home buyers. Freddie Mac's Home Possible Mortgage, available through more than 10,000 lenders, combines borrower education, early delinquency counseling, zero and 3 percent down payment versions with more flexible debt-to-income terms for low- and moderate-income households. The fixed-interest mortgages allow borrowers to commit as little as $500 toward the down payment and closing costs for a single-family property. The loans are available at competitive interest rates, says New England Power Mortgage's Newbury. One of the requirements of the Home Possible program is that borrowers take part in in a pre-purchase borrower education program. The program is aimed at reducing delinquencies and foreclosures. E. Dennis Kelly Jr., president of Bristol County Savings Bank, said buyers should be skeptical of loan offers that dangle impossibly low rates. Often they are an indication that the introductory deal lasts only a short time - after which the lender can jack up the percentage. Kelly also recommends that buyers thoroughly educate themselves about borrowing before committing themselves to a mortgage. Borrowers also need to look beyond their emotional desire to own a specific home and determine whether prospective payments fit comfortably within their budet. "Sometimes we want that home so badly that we fail to be realistic," he said. "You really need to educate yourself and do your homework."