Foreclosure's shadow falls across diverse set of US homeowners

Victor Castro bought his home four years ago, expecting the move would bring stability. The Massachusetts janitor thought he would no longer move from rental to rental.

Music teacher Al Ynigues bought his home in Minnesota with a similar plan: He expected to be living and teaching there for years to come.

In Michigan, Mary Beyer arranged to refinance her home loan in a bid to bring order to her finances. She was having trouble getting by on her fixed income of disability payments.

Now each faces the possibility of foreclosure. They share a common American dream of homeownership, but what's equally notable is their diversity. Their cases hint at the wide range of people who make up the group called "subprime" borrowers, who are now being hit hardest by a nationwide real estate slump.

They are white as well as black, old as well as young, and middle-income as well as low-income. As the name subprime implies, these loans aren't for the Rockefellers, but for people with rocky credit records. Yet this category of loans saw an unprecedented wave of expansion since 2002, encompassing millions of Americans.

The explanation lies partly in the housing boom itself. As land values pushed toward record highs, many borrowers stretched against their credit limits to afford a home. Lenders, often charging lucrative fees, stood ready to help them.

By the time the housing boom peaked in 2005, fully 20 percent of new mortgage loans were subprime, four times the share a decade earlier.

The borrowers are a diverse group:

• Many have low incomes, but Mr. Ynigues says he was pulling in nearly $3,000 a month when he took out his loan.

• A disproportionate share of subprime borrowers are black or Hispanic, but Ms. Beyer is among the large number of at-risk homeowners who are white.

• Many were buying homes for the first time, but many others, like Beyer, were refinancing loans originated years before.

• High-interest loans (often subprime) are common at the smaller end of the loan spectrum, but in 2005 they also accounted for 19 percent of large loans – those for $250,000 or more. Those large loans were just as numerous, and were growing faster, than those for less than $100,000, according to a Federal Reserve study published last fall.

• Many subprime borrowers fell into trouble because their loan payments adjusted upward, but Mr. Castro's challenge arose because of income more than interest rates. He lost a good job and is having difficulty collecting rent from a tenant downstairs.

"I thought it was a step forward," says the tall, soft-spoken man from the Dominican Republic, referring to the day he bought his home four years ago.

At the time, land prices were surging in the Boston area, even in Lawrence, where Latino immigrants now occupy neighborhoods that once housed textile workers along the Merrimack River.

Now it looks as if Castro will likely have to take a big financial step back.

The home, where the second floor has made a comfortable residence for his wife, child, and sister-in-law, is up for sale. So are two other homes on his block – homes that are now vacant and on their way toward foreclosure.

Castro hopes he can get about $300,000 for his house and then give the lenders what's left after the sales commission – probably about 75 percent of what they are owed.

As with many borrowers at risk, several changes combined to bring Castro to this point. Things were going well enough for several years. Between his paycheck, his sister-in-law's, and rent from the tenants, he was covering mortgage payments on the loan that had financed 80 percent of his original purchase, as well as on the loan that had financed the other 20 percent of the home's cost.

But in recent months the rental income grew less reliable. The city's water bills multiplied. One of Castro's loans adjusted upward, which pushed his total payments to above $2,600 a month. Then came the biggest blow of all: His job was phased out. Now he's working a full week, but for a temp agency that pays much less.

All this comes at a time when the housing market in Lawrence is reeling. The number of foreclosures in progress doubled in 2006, with 425 as of December.

That's weighing on home values in a city where only about twice that many homes sell in a good year, says Mayte Rivera, a Northeastern University doctoral candidate who is researching Lawrence's foreclosure problem.

Lawrence is in some ways typical of the excesses of the nation's subprime boom.

The expansion of higher-risk credit was fueled by a confluence of factors: rising home values, rising buyer aspirations, and an influx of eager lenders.

The borrowers nationwide tended to be immigrants or African-Americans. Subprime loans accounted for some 40 percent of all mortgages for Hispanic borrowers, and 52 percent of mortgages for blacks, in 2005. Meanwhile, 19 percent of white borrowers took a subprime loan that year, according to research by the Center for Responsible Lending in Durham, N.C.

In a ranking of cities with the highest share of subprime loans that are past due, or in foreclosure, cities with a high share of minority residents top the list. But the list is also dominated by places where the economy has been weak, among them Cleveland, Detroit, and South Bend, Ind.

The subprime problems are growing fastest in a state where residents are stretched the hardest in their quest for homeownership: California.

"The negative impact of foreclosures falls disproportionately on communities of color," the Center for Responsible Lending concludes in a recent analysis. Yet, the report adds, "in absolute terms, white homeowners received three times as many higher-cost mortgages and therefore will experience a significant number of foreclosures as well."

Indeed, subprime credit washed through suburban communities as well as inner cities.

Jenison, Mich., is a case in point.

The town, near Grand Rapids, is the place Mary Beyer has called home for 20 years. Her home is modest. But now she is paying dearly for every one of its 900 square feet. Divorced and living on a fixed income, she saw refinancing as a way to bring her budget into balance four years ago.

Although the "refi" deal provided some cash up front, it depleted her equity in the house. Her monthly payments went up. Her troubles deepening, Beyer called her mortgage broker for help. The result: another refi. Then another with a different lender. Then another.

"If I could go back ... ," she muses, recalling the $600 monthly payments she owed in 2002. After four refis in four years, Beyer says she is left with no home equity and a monthly payment that outweighs her whole income. She feels duped by the lenders and is filing a lawsuit with help from Legal Aid of Western Michigan.

She hopes other homeowners can reap some cautionary wisdom from her experience.

"When [you're] not thinking plain and when [you're] desperate, don't make any quick decisions," she advises. "That's when they're going to nail you."

Al Ynigues, a music teacher, also lives in suburban America, in the community of Apple Valley on the outskirts of Min-neapolis. He found a home to buy in 2004.

"It looks like the presidential White House. It's got those colonial columns in front," he says. What he likes best are the rooms inside for his music business – one for teaching percussion, one for piano, one for doing recordings and repairs.

What he likes least is his mortgage arrangement.

His interest rate began moving up last fall, two years into the loan. Meanwhile, his income is now a bit lower than when he bought the home. He had wanted a fixed-rate loan, but the mortgage broker steered him toward an adjustable.

"I was gullible," Ynigues concedes in retrospect. He says he learned later that the broker reaped $5,000 in a kind of kickback, called a "yield spread premium," from the finance company for generating a high-interest loan.

In March, he testified on Capitol Hill, urging Congress to take action to protect future homeowners from predatory practices. With the help of Acorn, an advocacy group, he hopes to modify his loan and keep the house. Many lenders will consider reducing an interest rate, for example, if doing so will save them the cost of foreclosing on a property.

"It's a beautiful home," Ynigues says. "I want to stay."