Homeownership can be short-lived in inner cities

A short walk through low-income neighborhoods in major US cities yields a distressing countertrend to today's home-ownership boom.

"For sale" signs proliferate - testaments to a sudden jump in foreclosures in the nation's inner cities. The trend is seen from Chicago to Miami to Philadelphia, a city where the number of families who've lost their homes because they couldn't make their mortgage payments has doubled since 1997.

A number of explanations are possible, including looser lending standards in recent years and job instability among inner-city residents.

But some consumer advocates are casting blame in another direction: mortgage lenders who target unsophisticated borrowers and negotiate deals with hidden costs and high fees.

Concern about "predatory lending" is particularly heightened now, as low interest rates prompt many homeowners to refinance their mortgages. States and cities - most recently Philadelphia - are taking steps to protect consumers from such lenders, in an effort to help poor and working-class residents keep their foothold in America's middle class.

The crackdowns on mortgage lenders, which affect firms that specialize in loans to people with poor credit as well as the industry at large, are intended to protect people like the Thorpes, who own a two-story home in Philadelphia's Olney neighborhood.

Trouble at the Thorpes'

When the couple chose to refinance the mortgage on their $35,000 house last year, they thought they'd get lower interest payments and fewer bills after consolidating their debts. What they ended up with were phantom fees, including a $2,700 service charge and a $1,400 life insurance policy they didn't want. They now owe more money than their house is worth, and are struggling to avoid foreclosure.

"I had no idea they would charge those kinds of fees," says Judy Thorpe. "You're in there with three people saying different things, and at no point do they give you the chance to look over the contract."

The Thorpes are among thousands of US families to gain access to loans in the past decade. The number of subprime loans (loans to people with poor credit ratings) rose from 100,000 in 1993 to 1 million in 1999, according to the US Department of Housing and Urban development.

As of 2000, about 5.5 percent of all subprime borrowers in the US were seriously delinquent with their payments - a 1 percentage point jump in just one year. In Chicago, subprime foreclosures rose from 131 in 1993 to 5,000 in 1999.

The explanation, according to consumer groups and lawmakers, is the increasingly unethical behavior of some mortgage and credit companies.

Anecdotal evidence suggests that the outright illegal deals are conducted mostly by individual scam artists.

But some practices - such as upfront balloon payments, withdrawal penalties, and the targeting of the elderly and minorities - are commonplace in mainstream lending.

Predatory practices include:

* Targeting high-interest loans to people who could qualify for conventional home loans.

* Including misleading loan conditions, like hidden insurance payments.

* Adding more than 5 percent to the loan amount in points and fees.

* Unnecessary refinancing meant to draw repeated lender fees.

Critics say Wall Street is the catalyst behind the unethical tactics.

"Investors have a lot of influence over the terms of loans," says Chris Saffert, legislative director for ACORN, a consumer-advocacy group. "They are providing capital and directing lenders in being very aggressive in their collection practices."

This year, however, city and state governments are starting to rein in such practices. New rules are already on the books in Chicago, Denver, and Washington, D.C. Legislatures in California, Georgia, and Tennessee are considering action. And a bill has been proposed in the US House.

The broadest measure was enacted April 20 in Philadelphia, where the city council unanimously voted to bar the city from doing business with companies that make predatory loans. It also capped the fees lenders can charge on loans to city residents.

The US government has also taken action. In March, the Federal Trade Commission filed suit against the largest lender in the nation, Associates First Capital Corp., owned by Citigroup Inc. The FTC charged it with routinely lying and deceiving consumers. Last week, Citigroup suspended 20 percent of Associates' brokers, citing "integrity concerns."

According to ACORN (Association of Community Organizations for Reform Now), the other major offender is Household International - the second largest subprime lender in the country.

Craig Streem, Household's spokesman, says the firm's research into accusations of predatory lending revealed that borrowers understood the terms of their loans in each case.

Unintended consequences?

Not everyone thinks the new laws are the best answer. They only discourage legitimate creditors from lending to high-risk applicants - and slow the climb of millions up the socioeconomic ladder, critics say.

"Lenders will get discouraged with offering [subprime] loans now and say it's just not worth it," says Mark Riedy, director of the Real Estate Institute at the University of San Diego.

That was what happened with Countrywide, a national mortgage company. After North Carolina passed legislation to try to prevent predatory lending in 1999, the first state to do so, Countrywide stopped offering subprime mortgages there altogether.

The company's move is a sign of things to come, says Jim Biery, president of the Pennsylvania Bankers Association. "Absolutely these laws will make it more difficult to offer subprime loans," he says. "This changes the rules too much."

(c) Copyright 2001. The Christian Science Monitor