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Foreclosure's shadow falls across diverse set of US homeowners

At the housing boom's peak in 2005, 20 percent of new mortgage loans were subprime, four times the share a decade earlier.

By Staff writer of The Christian Science Monitor / April 9, 2007

Lawrence, Mass.

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.

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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.