Trying to survive a sub-prime squeeze

Special to The Times

Bad financial decisions and poor timing have landed Alicia Cardenas smack in the middle of the nation's sub-prime mortgage mess.

The single mother of three could qualify only for a high-interest loan when she refinanced two years ago to pay off a home equity credit line and her share of a divorce settlement.

But her hefty mortgage payment puts Cardenas, 45, in a financial hole each month. She can't save for her children's college education or her retirement. And now the loan threatens her efforts to provide a comfortable home for her family, including her 79-year-old mother.

Next month, the financial pressure will mount when the adjustable rate on Cardenas' $410,000 mortgage increases, raising her monthly payment by $462 to $3,291.

"I'm scared to death just thinking about it," Cardenas said. "If it increases, I'm dead in the water."

Jennifer Hartman, a certified financial planner with Greenleaf Financial Group, said Cardenas got into trouble because she didn't take the time to understand her finances or the ramifications of her sub-prime refinancing.

"The loan should have never been made, and she should have never taken it out because she couldn't afford it in the first place," Hartman said.

Cardenas is one of millions of Americans with risky credit who took out adjustable-rate loans that offered low teaser rates for a year or two before ratcheting up sharply.

So-called sub-prime loans have been resetting to higher rates, tipping already tenuous borrowers into default and roiling the economy. While the nation's regulators and lawmakers grapple with the sub-prime meltdown, Cardenas lives the financial reality of it.

'An albatross'

Her mortgage gobbles up more than half of the take-home pay from her $80,000-a-year job as a human resources manager for a dairy. She has only $590 in savings and retirement funds, receives $300 a month in child support and owes nearly $8,000 in bills. Each month, she finds she needs $600 to cover expenses until her next paycheck, so she takes out pay-day loans.

"It's an albatross around my neck," Cardenas said of the mortgage.

More than a decade ago, the future seemed much brighter. A high school graduate, Cardenas was the first in her family to own a home when she and her former husband bought a two-bedroom house with a sunny den and a big backyard in a neighborhood crawling with kids.

"We were happy," Cardenas said. "We felt comfortable and safe."

But the couple burdened themselves with more mortgage debt by using their house like a piggy bank. Tapping the rising equity, they refinanced to pay off credit card debts, take vacations and remodel.

Two years after buying the house for $123,000, they refinanced for $250,000. With the money, they paid off $30,000 in credit card debt, $20,000 in car loans and took a vacation to Guadalajara.

Three years later, they took out a $50,000 home equity line of credit, adding two bedrooms and a bath.

"She fell into the boat of people who thought the value of their home would keep rising," Hartman said.

After the couple separated three years ago, Cardenas wanted to keep the home, mostly for emotional stability. But that's not the best financial move because it's often difficult to sustain a home on a single income, Hartman said.

Falling behind

That's been the case with Cardenas. On her previous salary of $60,000, she struggled to pay the mortgage and the home equity line. Then she hit a rough patch. The aerospace company she worked for reorganized and she was laid off.

Unable to find full-time work immediately, Cardenas fell behind on her bills. She cashed out $15,000 in her 401(k) retirement account to stay afloat. But threatened with foreclosure and in need of $90,000 for her share of the divorce settlement, Cardenas rushed to refinance.

Because of her marred credit, she could qualify only for a high-interest loan. The mortgage came with an adjustable rate scheduled to increase to 9.375% next month.

The mortgage isn't Cardenas' only problem. She also added to her difficulties by spending instead of saving.

Recently, when her 19-year-old daughter's car broke down, she borrowed $6,500 to buy her a new one. Cardenas said her daughter needs the car to pick up her 11-year-old sister and her 9-year-old brother from school. In addition, she used part of a $5,000 tax refund to pay off some debts, but she also splurged on a trip to New York with a girlfriend.

"When you get a tax refund, its not free money," Hartman pointed out.

Hartman said that Cardenas couldn't afford the car and that her daughter should shoulder the costs. Cardenas has just $350 in savings and $240 in retirement funds. She also owes $1,200 for her daughter's braces.

No easy options

Now, Cardenas is stuck with some tough choices. To get out from under her sub-prime debt, she could renegotiate with her lender, attempt a so-called short sale or fall into foreclosure.

"She's got some options," Hartman said. "But they all come with sacrifice."

Through the Neighborhood Assistance Corp. of America, a nonprofit group that helps homeowners, Cardenas could negotiate to lower her interest rate with her lender, Countrywide Financial Corp. The group has helped sub-prime borrowers renegotiate interest rates down to 3% to 6%.

Hartman figured that if the loan gets restructured into a 30-year fixed rate of roughly 5%, Cardenas would pay about $2,200 a month. Then she could create some cushion to fund emergency expenses and begin saving for retirement.

But she also would need to slash about $1,000 a month of expenses and get her family to pitch in. Her mother receives $800 a month in Social Security but doesn't contribute to the household budget. Her teenage daughter also could get a job.

Another option is to ask her lender for a short sale, in which Countrywide would agree to sell her home for less than what she owes and forgive the remaining debt.

But Alex Aguilar, a real estate agent with RE/MAX, said short sales were difficult to pull off, particularly in Cardenas' neighborhood where home prices have dropped. Appraisers valued Cardenas' house at $550,000 when she refinanced, but it's now worth less than what she owes.

Entering into foreclosure and moving into an apartment would cut costs. Three-bedroom apartments closer to Cardenas' work in El Monte rent for $1,800. But Hartman said foreclosure would damage her credit for years, hurt her chances to get a future mortgage and raise her insurance rates.

What's more, depending on certain criteria, a bank's loss may be reported as income, Hartman said. As a result, if Cardenas walks away from the contract with her lender, she might end up owing the Internal Revenue Service taxes on the balance she never paid.

Cutting costs

Whatever she decides to do, Hartman said, Cardenas needs to get a better handle on her household budget, which doesn't account for typical yearly expenses such as haircuts, car registration and school supplies.

She also needs to look for ways to drum up more cash. Cardenas is in human resources and could start a resume-building business on the side, Hartman said. She might also consider renting out a room in her house.

Hartman advised Cardenas to get her whole family involved in her financial makeover.

Although Cardenas might not be able to fund her children's college educations, she could provide them with a better financial future by teaching them how to save and by giving them choices about how the family's money is spent.

For example, Cardenas could offer the kids incentives for conserving electricity by giving them half of any savings for entertainment.

Cardenas also could save by switching out her variable life insurance policy, which costs about $1,000 a year, for a term-life policy at about half the cost, Hartman said.

Cardenas is mulling over her next financial move. She has filed her mortgage and financial information with the Neighborhood Assistance Corp. of America and is waiting for a response before deciding what to do with her house.

"I'm paying off everything I can," she said. "The only other thing I can do is leave it in God's hands."

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Begin text of infobox

In need of help

Who: Alicia Cardenas, 45

Income: $80,000

Goals: Refinance her high-interest adjustable-rate mortgage, save for retirement and children's college educations, make repairs on home.

Assets: $240 in 401(k), $350 in checking, $300 in a college savings account, a 2002 Toyota Sienna minivan, daughter's 2002 Nissan Altima, personal property.

Debts: $410,000 mortgage, $6,500 car loan, $125 credit card balance, $1,200 for daughter's braces.

Recommendations: Try to renegotiate current sub-prime loan through the Neighborhood Assistance Corp. of America. Create an accurate household budget. Reduce spending and household expenses by $1,000 a month. Don't use credit cards except for an emergency. Get other family members to help out.

About the planner: Jennifer Hartman is a fee-only certified financial planner with Greenleaf Financial Group in Los Angeles.

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