Foros de la Plataforma por una Vivienda Digna

[billy]

For decades, the 5100 block of West Outer Drive in Detroit has been a model of middle-class home ownership, part of an urban enclave of well-kept Colonial residences and manicured lawns. But on a recent spring day, locals saw something disturbing: dandelions growing wild on several properties.

"When I see dandelions, I worry," says Sylvia Hollifield, an instructor at Michigan State University who has lived on the block for more than 20 years.

Ms. Hollifield's concern is well-founded. Her neighbors are losing interest in their lawns because they're losing their homes -- a result of the recent boom in "subprime" mortgage lending. Over the past several years, seven of the 26 households on the 5100 block have taken out subprime loans, typically aimed at folks with poor or patchy credit.

Some used the money to buy their houses. But most already owned their homes and used the proceeds to pay off credit cards, do renovations and maintain an appearance of middle-class fortitude amid a declining local economy. Three now face eviction because they couldn't meet rising monthly payments. Two more are showing signs of distress.

"This has stripped us of our whole pride," says April Williams, 47 years old, who has until August to pay off her mortgage or vacate the two-story Colonial at 5170, where she and her husband have lived for 11 years. "There's going to be no people left in Detroit if they keep doing this to them."

The fate of people on West Outer Drive offers a glimpse of a drama that is playing out in middle- to lower-income, often minority-dominated communities across the country. In addition to putting families into homes, subprime mortgages and the brokers who peddle them are helping to take families out of homes in which they've lived for years, eroding the benefits that proponents on Wall Street and in Congress have long touted.

The borrowers' difficulties raise questions about how the extension of easy credit to large swaths of the U.S. population will ultimately affect people and the broader economy -- questions that have gained in urgency as a sharp rise in defaults has policy makers wondering what, if anything, they can or should do.

Much of the focus in the subprime debacle has been on the demise of bubble markets in balmy locales such as California and Florida. But the subprime market has also channeled a surprising amount of money into some of America's poorer and more-troubled local economies.

In 2006 alone, subprime investors from all over the world injected more than a billion dollars into 22 ZIP Codes in Detroit, where home values were falling, unemployment was rising and the foreclosure rate was already the nation's highest, according to an analysis of data from First American LoanPerformance. Fourteen ZIP Codes in Memphis, Tenn., attracted an estimated $460 million. Seventeen ZIP Codes in Newark, N.J., pulled in about $1.5 billion. In all of those ZIP Codes, subprime mortgages comprised more than half of all home loans made.

The figures show the extent to which the new world of mortgage finance has made the American dream of homeownership accessible to folks in previously underserved communities. By some estimates, subprime lending has accounted for as much as half of the past decade's rise in the U.S. homeownership rate to 69% from 65%. But as the experience of West Outer Drive illustrates, the flood of cash has also encouraged people to get into financially precarious positions, often precisely at the time when they were least able to afford it. In doing so, it may have temporarily alleviated -- but ultimately worsened -- some of the nation's most acute economic problems.

"The market was feeding an addict at its neediest point," says Diane Swonk, who spent 19 years analyzing consumer credit in the Midwest and now serves as chief economist at Chicago-based financial-services firm Mesirow Financial. "Individuals will resist reductions in their standard of living with everything in their power, including mortgaging their futures."


If events unfold as some predict, subprime lending could end up eliminating more homeowners than it created. One study by the Center for Responsible Lending, a nonprofit that focuses on abusive lending practices, forecasts that the subprime boom will result in a total of 2.4 million foreclosures nationwide, most of them on homes people owned before taking out the loans. That outweighs even the most optimistic estimates of the number of homeowners created, which don't exceed two million.

To understand how the legacy of subprime lending looks on the ground, take a ride around the West Outer Drive area with Carlton McBurrows, who grew up in the neighborhood and now works as a community organizer for Acorn, an advocacy group that provides financial counseling to lower-income families. On one recent spring day, he counted four empty houses with big red refuse bins outside -- a sign that banks, having taken possession of the homes, were tossing out all the belongings and debris left behind by the previous inhabitants.

"This is a phenomenon that I've never seen before, and I've lived here all my life," he says. "I think this is just the beginning."

As opposed to other parts of urban Detroit, which tend to be plagued by burned-out homes, the area around the 5100 block of West Outer Drive has remained a place where people try hard to keep up appearances. Originally largely Jewish, the neighborhood became a bastion of home ownership for upwardly mobile blacks beginning in the late 1960s. Though the area's fortunes have slipped somewhat as people have moved out to the suburbs, it has boasted such famous residents as Aretha Franklin, Marvin Gaye and Berry Gordy, the founder of the Motown record label.

"It was like when you made it to Outer Drive, you'd made it," says Deborah Herron, 52, a former administrative assistant who lived in the area for 35 years.

Back in its heyday, the idea that West Outer Drive could suffer from a glut of credit would have seemed far-fetched. Many blacks moving into the neighborhood had to either depend on federal mortgage programs or buy their homes outright. That's because banks actively avoided lending to them, a practice known as "redlining" -- a reference to maps that designated certain neighborhoods as unduly risky. Various attempts to get the money to flow, such as the Community Reinvestment Act of 1977, which pushed banks to do more lending in the communities where they operated, had only a limited effect.


But beginning in the mid-1990s, the evolution of subprime lending from a local niche business to a global market drastically rearranged lenders' incentives. Instead of putting their own money at risk, mortgage lenders began reselling loans at a profit to Wall Street banks. The bankers, in turn, transformed a large chunk of the subprime loans into highly rated securities, which attracted investors from all over the world by paying a better return than other securities with the same rating. The investors cared much more about the broader qualities of the securities -- things like the average credit score and overall geographic distribution -- than exactly where and to whom the loans were being made.

"You have no time to look really deeply at every single borrower," says Michael Thiemann, chief investment officer at Collineo Asset Management GmbH, a Dortmund, Germany-based firm that invests on behalf of European banks and insurance companies. "You're looking at statistical distributions."

Suddenly, mortgage lenders saw places like West Outer Drive as attractive targets for new business, because so many families either owned their homes outright or owed much less on their mortgages than their homes were worth. Lenders seeking to tap that equity bombarded the area with radio, television, direct-mail advertisements and armies of agents and brokers, often peddling loans that veiled high interest rates and fat fees behind low introductory payments. Unscrupulous players had little reason to worry about whether or not people could afford the loans: The more contracts they could sign, the more money they stood to make.

"The pendulum has swung too far in the other direction," says Dan Immergluck, a professor of urban planning at Georgia Institute of Technology who has written a book on redlining. "We have too much credit, and too much of the wrong type of credit."

Minority-dominated communities attracted more than their fair share of subprime loans, which carry higher interest rates than traditional mortgages. A 2006 study by the Center for Responsible Lending found that African-Americans were between 6% and 29% more likely to get higher-rate loans than white borrowers with the same credit quality.

Subprime mortgages accounted for more than half of all loans made from 2002 though 2006 in the 48235 ZIP Code, which includes the 5100 block of West Outer Drive, according to estimates from First American LoanPerformance. Over that period, the total volume of subprime lending in the ZIP Code amounted to more than half a billion dollars -- mostly in the form of adjustable-rate mortgages, the payments on which are fixed for an initial period then rise and fall with short-term interest rates.

"A lot of people were steered into subprime loans because of the area they were in, even though they could have qualified for something better," says John Bettis, president of broker Urban Mortgage in Detroit. He says a broker's commission on a $100,000 subprime loan could easily reach $5,000, while the commission on a similar prime loan typically wouldn't exceed $3,000.

The boom in subprime lending paved the way to home ownership for many people: Over the past three years, three people on the 5100 block have used subprime loans to buy homes. In at least two of those cases, though, the experience has not gone well. Raymond Dixon, a 36-year-old with his own business installing security systems, borrowed $180,000 from Fremont Investment & Loan in 2004 to buy a first home for himself, his wife and six children, across the street from Ms. Hollifield at 5151 West Outer Drive. After all the papers had been signed, he says, he realized that he had paid more than $20,000 to the broker and other go-betweens. "They took us for a ride," he says.

Bishop Charles Ellis, senior pastor of the Greater Grace Temple in Detroit, says he has heard many similar complaints from people in the area who, either because they were new to the process or had good experiences in the past, had put too much trust in subprime-mortgage brokers. Still, he believes many bear responsibility for their predicaments. "If you have a contract in front of you, you have to read that contract," he says.

Mr. Dixon defaulted on the loan after the monthly payment jumped to more than $1,500 from $1,142 -- a rise he says put too much strain on his income from his security business. The foreclosure process began in late November, and Mr. Dixon says he expects an eviction notice this week. A spokesman for Fremont said the company, which is in the process of exiting the residential mortgage business, has taken measures to reduce defaults but does not comment on specific customers.

Up at the north end of the block, Jennifer Moore and her husband, John, bought a two-story beige-brick house in December 2004. She says her husband had excellent credit, but in the rush to buy his "dream house" he agreed to take out two subprime loans from EquiFirst Corp., one for $164,000 and the other for $41,000 -- a "piggyback" arrangement that allowed him to avoid a down payment. Ms. Moore said the real-estate agent told them they could refinance into a fixed-rate loan within two years, after which the payments on the larger loan were scheduled to reset.

Mr. Moore's death in 2006 scuttled the refinancing plans. Now Ms. Moore, a 56-year-old clerical worker for Wayne County, has fallen behind on the monthly mortgage payments, which she says rose earlier this year to $2,200 from about $1,450. After more than 30 years as a homeowner, she now expects to lose the house -- including the back porch she built to take in the sun and the library she decorated with her son's baseball and basketball trophies. "I'll get an apartment," she says. "I'm not going to buy another place." An EquiFirst spokeswoman said the company doesn't comment on specific customers.

For many who already owned their homes, offers of easy credit came at a time when a severe economic downturn had left them in need of money to maintain middle-class lifestyles. Since the year 2000, the decline of the auto industry has cost the Detroit metropolitan area about 20,000 jobs a year, helping turn the shopping areas near West Outer Drive into scenes of defunct businesses, payday lenders and liquor stores. According to the latest data from the Internal Revenue Service, households in the 48235 ZIP Code reported an average adjusted gross income of $32,902 in 2004, up slightly from $32,817 in 2001 but down 6% in inflation-adjusted terms.

April Williams was feeling the pain of the downturn back in 2002, when she saw an ad from subprime lender World Wide Financial Services Inc. offering cash to solve her financial problems. At the time, production slowdowns at Ford Motor Co. were squeezing her husband's income from an assembly-line job, and they'd heard rumors that more cutbacks were coming. Still, after a loan officer from World Wide paid a visit, they became convinced they could afford stainless-steel appliances, custom tile, a new bay window, and central air-conditioning -- and a $195,500 loan to retire their old mortgage and pay for the improvements. The loan carried an interest rate of 9.75% for the first two years, then a "margin" of 9.125 percentage points over the benchmark short-term rate at which banks lend money to each other -- known as the London interbank offered rate, or Libor. The average subprime loan charges a margin of about 6.5% over six-month Libor, which as of Tuesday stood at 5.38%.

"I knew better than to be stupid like that," she says. "But they caught me at a time when I was down."

She wasn't alone. Locals say West Outer Drive became a beehive of renovation activity in the first half of the decade, even as the economy sagged. Up the block from Ms. Williams, Ordell Walker, who says he left a job at DaimlerChrysler several years ago, put in a new driveway, glass-brick windows on the basement and stairwell, and much more. To get the cash, he jacked up his mortgage to $205,000 from $108,000 in 2002, partly with the help of World Wide. "A lot of people took the cash," he says. "I wish I'd never done it myself."

Last year, the Michigan Office of Financial and Insurance Services revoked World Wide's license amid allegations of fraud. Jeff Arnstein, who was a team leader at World Wide in 2002 and who Ms. Williams says processed her loan, said he didn't remember the specific case but he believed the loan was properly underwritten. "My heart goes out to them," he said. "But it's not the fault of the mortgage company that put them in their loan." Mr. Arnstein now works for First Mortgage Corp. near Phoenix.

Both Ms. Williams and Mr. Walker have found themselves in a predicament now common among homeowners in Detroit: They've tried to sell their houses, but can't find buyers willing to pay what they owe on their mortgages. After two years on the market, Ms. Williams says her house has attracted a high bid of $140,000, nowhere near the $211,000 debt she must settle to avoid eviction. That leaves her with no option but to abandon the house -- the worst possible outcome for the neighborhood, because it means the property could end up gutted with a big red debris bin out front.

Kevin Lightsey, a local agent at Keller Williams Realty, says he doubts such foreclosed homes are likely to find new owners willing to live there. "Nobody's going to want to buy into a neighborhood with 20% foreclosures," he says. "You end up with no neighborhood." First American LoanPerformance estimates that, as of March, about one in three subprime loans made from 2002 through 2006 in the 48235 ZIP Code were more than 60 days in arrears, meaning they were either already in foreclosure or well on their way there. Even loans made in 2006 had a delinquency rate of about 17%.

Some subprime borrowers on the 5100 block of West Outer Drive say they are doing fine and planning to stay put. Kevin Ransom, a 42-year-old investment banker who grew up in the area, moved into the red-brick Colonial across from Ms. Hollifield in 1999, leaving behind a job in New York. He bumped up his mortgage debt to $208,250 from $170,100 back in 1999, and put the money into a new roof, marble floors, custom ceilings and a finished basement. He says his income has grown enough to make the monthly payment, which has risen to about $1,700, from $1,200 when he took out the most recent loan in 2002.

"I always had a desire to come back home and try to be in a community," says Mr. Ransom.

Still, he's worried about the way some of his neighbors are losing interest in their homes. Consider Jacqueline McNeal, a school principal who has lived in the house two doors north of Mr. Ransom since 1995. In 2002, she says, she took out a $112,700 loan from Full Spectrum Lending, a subprime arm of Countrywide Financial Corp., to pay off department-store bills, provide financial help to some out-of-work relatives and retire her old fixed-rate mortgage. But last year, as the interest rate on her loan rose to 12% from an initial 8.75%, she fell behind amid a litany of difficulties, including a teachers' strike and problems with the payment of her back property taxes. A Countrywide spokesman said there was nothing inappropriate in the origination or the servicing of the loan.

Now in foreclosure, Ms. McNeal has until early July to come up with the money or be evicted. She doubts she can sell the house, and the missed payments have dented her credit to the point where she can't get another loan. So she's letting the dandelions grow.

"You have two options -- to sell it or to refinance it," she says. "But if you can't do either, what can you do?"

http://online.wsj.com/article/SB118047548069017647.html?mod=hpp_us_pageone

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http://online.wsj.com/public/resources/documents/info-detroitsubprime07.html