Primed to fail

They were risky borrowers, but mortgage companies were happy to help - at high interest rates. Now the subprime market is crashing, and casualties mount.

By Susan Taylor Martin
Published March 25, 2007

After landing in bankruptcy court in 2004, Cynthia King was deluged with letters from companies offering to help straighten out her finances so she wouldn't lose her cozy St. Petersburg home.

King went with a $143,250 loan from Resmae Mortgage of California. It paid off her original mortgage and gave her some extra cash, but it came with a hefty interest rate - 8.39 percent.

A certified nursing aide, King struggled to make the $1,090 monthly payments, which didn't include ever-rising taxes and insurance. She fell behind last fall, and now faces foreclosure for the second time in three years.

"I'm going to lose the house," says King, a divorced mother of two. "I love being here, but now I wish I hadn't gotten into this."

Both King and Resmae are casualties of the latest crisis to hit the housing industry - the mounting delinquency rate of loans made by subprime mortgage companies to borrowers with shaky credit.

Resmae recently filed for bankruptcy protection, joining at least 24 other companies that have closed or sought buyers since the percentage of delinquent subprime loans hit 7.47 percent late last year. That's more than double the delinquency percentage for all home loans.

Another California company, Fremont Investment & Loan, is getting out of the residential subprime business and will lay off hundreds of employees at its Tampa regional hub.

Unlike prime lenders, which require reams of documentation, subprime companies often loan money without even asking borrowers for proof of income. With lax regulatory oversight, they also push 100 percent financing, interest-only loans and other "creative products" to put cash-strapped buyers into homes.

The upside for the companies and the downside for borrowers: interest rates that ballooned as high as 17 percent.

"There is a tremendous amount of risk in those loans and they are priced accordingly," says Keith Getic, a Tampa mortgage underwriter who now works only with prime lenders.

With $1.8-trillion in outstanding subprime loans, the industry's meltdown is having a ripple effect. It is blamed in part for recent volatility in the stock market and has sparked fears that many more people will lose their jobs and houses.

"I think Congress is going to have a lot of incentive to start doing something about it, because the potential implications for the economy and the millions of Americans who are facing foreclosure are so severe," says Christopher Peterson, a University of Florida law professor.

Risk vs. reward

Subprime companies found fertile ground in the Tampa Bay area as home values soared in 2004 and much of 2005. The old rule of thumb - no mortgage within seven years of a bankruptcy - went out the window as lenders scrambled to make loans to borrowers they once would have shunned.

"It's risk vs. reward," says Richard Doyle, a Pinellas County real estate agent. Lenders "get higher interest in return for higher risk."

Among Doyle's clients is a resident of upscale Belleair Beach who got a $576,000 loan at 8.65 percent interest from Fremont in 2005 even though he had filed a personal bankruptcy four years earlier. He defaulted on the payments, and the house is now in foreclosure, slated for public sale in April unless a buyer can be found before then.

The property was originally worth the loan amount, but housing values have dropped in Pinellas "absolutely without question," Doyle says. "There's an unprecedented level of inventory."

And the inventory is increasing, potentially driving prices down even more, as subprime borrowers struggle with onerous payments.

In St. Petersburg's Shore Acres neighborhood, a $510,000 waterfront home sold in September to a man who financed the purchase with $500,000 in loans from Resmae at 8.08 interest.

The house is already up for sale because the borrower "found himself in financial difficulty with his business," his real estate agent says. Not only does the man have a $116,000 judgment against him from an ex-business partner, he was arrested last month on felony drug charges.

High-interest mortgages have forced other borrowers into bankruptcy, including ones who thought they would have no trouble making the payments. Among them is Andrea Capitano, who was working for JP Morgan Chase when she bought her late grandmother's house in Tampa's Seminole Heights.

"I was making a fairly good amount of money and I thought it was something I could later turn into a good investment," says Capitano, 26.

Despite credit card problems when she was younger, Capitano was in good standing on her car loan. In May 2005, she got a $164,000 mortgage from Fremont at 7.9 percent. The monthly payments were about $1,200, not including taxes and insurance.

Almost immediately, Chase laid off hundreds, including Capitano, and within a few months she was in arrears. To stave off foreclosure, she sought bankruptcy protection last year.

Capitano supported herself and her son with various jobs, including selling vintage toys on eBay, and resumed payments under a court-supervised plan. But two weeks ago, she put the house up for sale.

"I really, really do wish now I hadn't taken the loan," says Capitano, who has returned to college. "I wish I thought more with my head than my heart."

Another subprime borrower, Stalonda Bullard, wishes she had better understood what she was getting into when she entered a cycle of ever larger loans at ever higher interest rates.

"I think it's a ripoff, but some people have to do what they have to do," says Bullard, a licensed practical nurse trying to save her St. Petersburg home.

Bullard, 44, and her husband bought the house in 1999 and were so deeply in debt by 2005 that she filed a Chapter 7 liquidation bankruptcy. To pay off the original mortgage, her student loans and other bills, she refinanced with Resmae for $111,000 at 9.9 percent interest.

When she began slipping behind in the payments, she refinanced again, this time in January with a $133,250 loan from Fremont at 11.99. She says a mortgage broker steered her to Fremont "because my credit wasn't up to par."

Bullard, who has two children, managed to make the first payment of $1,300, exclusive of taxes and insurance. She is working a second job so she can pay her utility bills.

"I'm just going, going, going," she says. "I go to sleep and I get up and go."

Unsafe, unsound

Fremont does not comment on individual cases but said in a statement that it tightened income requirements for subprime loans.

In a congressional hearing this month, both Democratic and Republican senators rapped federal regulators for not doing more to stop the growth of risky loans to borrowers with poor credit. Regulators have drafted rules that would make it harder to offer adjustable rate loans, and the Federal Deposit Insurance Corp. recently ordered Fremont to stop marketing loans "in an unsafe and unsound manner that greatly increases the risk" of default.

One reason subprime loans were pushed so aggressively is that mortgage brokers received fees based on volume, not the quality of the loans, says professor Peterson.

"They aren't the ones who lose if the loan doesn't get paid back," he says. "That creates incentives for them to be very fast and loose with underwriting."

As with other mortgages, most subprime loans are resold to institutional investors eager to earn high interest. For a time, that gave the subprime lenders even more money to make loans to people with bad credit.

"Essentially, there was a big pot of money looking for borrowers," said Mark Vitner, senior economist for Wachovia Bank. "Whenever we've had too much liquidity, it creates problems and that's what's happening here."

Subprime mortgages hit their peak last year, when they made up about 25 percent of all home loans. As delinquencies rose, Wall Street began tightening the credit lines of subprime companies, with the result that "the most egregious lenders are largely shutting down," Vitner says.

"In terms of the threat that the problem in the subprime market poses for the rest of the economy, I think it is gravely overstated," he said.

Determined to stay

That is scant comfort for thousands of borrowers like Hattie and Jerry Jones.

In 2002, they bought a house in the Port Tampa area with a Fremont mortgage at 8.9 percent. On his Social Security and her modest wages as a nurse's aide, the Joneses can barely make the $603 monthly payments - which don't include taxes or insurance - and keep up with their other bills.

Mounting debts forced the couple into bankruptcy court two years ago. They are determined to hang on to their home, even though they realize they would have been far better off renting.

"I don't want to walk away, but I sure feel like it," Hattie Jones says. "Buying a house is not really for people who don't have money."

Times researchers Caryn Baird and Cathy Wos contributed to this report. Susan Taylor Martin can be contacted at susan@sptimes.com.