REAL ESTATES FORUM

> The Wall Street Journal
>
> DAY OF RECKONING
> Subprime Aftermath: Losing the Family Home
> Mortgages Bolstered Detroits Middle Class -- Until Money Ran Out
>
> By MARK WHITEHOUSE
> May 30, 2007; Page A1
>
> DETROIT -- 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. Hollifields concern is well-founded. Her neighbors are losing
> interest in their lawns because theyre losing their homes -- a result
> of the recent boom in subprimemortgagelending. 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 couldnt 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 hermortgageor vacate the
> two-story Colonial at 5170, where she and her husband have lived for
> 11 years. Theres going to be no people left in Detroit if they keep
> doing this to them.
>
> TROUBLE ON WEST OUTER DRIVE
> See photos of the houses and homeowners1 with subprime mortgages on
> Detroits West Outer Drive, in an interactive map.http://tinyurl.com/2zr5ht
>
> 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 theyve 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 Americas 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 nations 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 ofmortgagefinance
> 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 decades 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 nations 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 dont
> 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 Ive never seen before, and Ive 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 areas 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, youd 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 federalmortgageprograms or
> buy their homes outright. Thats 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.
>
> Chart:http://tinyurl.com/ypmjdz
>
> 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,mortgagelenders 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. Youre looking at
> statistical distributions.
>
> Suddenly,mortgagelenders 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 UrbanMortgagein
> Detroit. He says a brokers commission on a $100,000 subprime loan
> could easily reach $5,000, while the commission on a similar prime
> loan typically wouldnt 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 residentialmortgagebusiness, 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. Moores death in 2006 scuttled the refinancing plans. Now Ms.
> Moore, a 56-year-old clerical worker for Wayne County, has fallen
> behind on the monthlymortgagepayments, 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 sons baseball and basketball trophies. Ill get an apartment,
> she says. Im not going to buy another place. An EquiFirst
> spokeswoman said the company doesnt 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 husbands income from
> an assembly-line job, and theyd 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 oldmortgageand 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 wasnt 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 hismortgageto $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 Id never done it myself.
>
> Last year, the Michigan Office of Financial and Insurance Services
> revoked World Wides 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 didnt remember the specific case but he
> believed the loan was properly underwritten. My heart goes out to
> them, he said. But its not the fault of themortgagecompany that
> put them in their loan. Mr. Arnstein now works for FirstMortgage
> Corp. near Phoenix.
>
> Both Ms. Williams and Mr. Walker have found themselves in a
> predicament now common among homeowners in Detroit: Theyve tried to
> sell their houses, but cant 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. Nobodys 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 hismortgagedebt 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, hes 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-ratemortgage. 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 cant
> get another loan. So shes letting the dandelions grow.
>
> You have two options -- to sell it or to refinance it, she says.
> But if you cant do either, what can you do?
>
> URL for this article:http://online.wsj.com/article/SB118047548069017647.html