Home buyers scared straight by rates
By JEREMY HERRON AP Business Writer
NEW YORK (AP) -- Tales of ballooning mortgage payments are scaring home buyers straight.
After taking on risky adjustable-rate loans or multiple mortgages to pay less upfront during the housing boom, borrowers with limited capital for down payments are increasingly opting for safer fixed-rate mortgages backed by private mortgage insurance.
Applications for private mortgage insurance, or PMI, rose 56 percent to 191,525 in March from February, according to the Mortgage Insurance Companies of America, an industry trade group. Volume fell in April, but remained well above rates from last year.
"The consumer is getting more cautious and returning to the tried and true fixed-rate loan with insurance," said Susan Wachter, a real estate professor at the Wharton School of Business.
Private mortgage insurance is typically required of a buyer who wants a fixed-rate mortgage but has a down payment of less than 20 percent. It costs a fixed percentage of the total loan, usually less than 1 percent, and insures the lender against default.
About $72.9 billion, or 11 percent, of the $680 billion in new mortgages originated in the first quarter were backed by PMI, according to Inside Mortgage Finance, a weekly industry newsletter.
That percentage is rising, said Guy Cecala, the newsletter's publisher - and not just because of consumer caution.
"I don't want to give consumers too much credit," he said. "The growth is also due to the fact that there's been a shift away from 'subprime' mortgages toward conventional ones."
Lenders have curbed loans to people with poor credit after that category had a surge in defaults and delinquencies. To qualify for federal backing from Freddie Mac and Fannie Mae, loans must carry insurance.
But during the housing boom that ended nearly two years ago, lenders were less worried about defaults or federal guarantees, and offered a host of options for borrowers without a large down payment.
Many customers took on loans that had low introductory payments that would reset a few years later. With home prices rising, owners reasoned they could either sell the property before the payment rose, or refinance at a lower or fixed rate.
"People thought the system was working for them, so why pay more initially when prices are rising?" Wharton's Wachter said.
One of the most popular tools was a "piggyback" loan. In what is known as a 80-10-10 loan, borrowers took out a mortgage for 80 percent of the home, paid 10 percent in cash, and then "piggybacked" a second mortgage onto the first for the remaining 10 percent. The second mortgage typically had higher interest at an adjustable rate.
With interest rates rising, that second loan is becoming more expensive. Demand for piggyback loans fell to an estimated 41 percent of the low down-payment market in the first quarter of 2007 from 54 percent in the year-ago period, according to a report by Wachter and Genworth Mortgage Insurance Corp.
With smarter consumers and stingier lenders, PMI is, virtually by necessity, in vogue again. And that's good news for the industry, where seven main players vie for the market.
PMI Mortgage Insurance Co. was the largest by market share with 23 percent in the first quarter, according to Inside Mortgage Finance. David Katkov, PMI's president, credited consumer awareness for the sector's gains.
"Consumers have connected the dots," he said. They "realize the days of double-digit home price appreciation are probably over for some period and are looking for the safest mortgage they can get into."
A temporary change in tax laws making payments tax deductible also boosted mortgage insurance demand, said Katie Monfre, a spokeswoman for Mortgage Guaranty Insurance Corp., the sector's third-largest player with about 18 percent of the market. Radian Group Inc. is second with just over 18 percent.
The tax break is only valid in 2007, but MICA, the industry group, is lobbying to make the change permanent.
Another advantage is that once the borrower has equity in the house equal to at least 20 percent of its value, he can cancel the insurance. MICA said 90 percent of PMI holders were able to cancel the premiums within 60 months.
Shares in the parent companies of the primary PMI companies are mixed so far this year, but have held up well compared with other mortgage-related businesses. And, as in the case of Genworth, PMI accounts for only a small percentage of revenue at some of the largest players.
PMI Group, the parent of PMI Mortgage, has added 2.5 percent since the start of the year through Wednesday. Genworth Financial added 4.5 percent. Radian, which is being bought by MGIC, surged 8.5 percent, with a huge boost from the acquisition, while MGIC is off 2.3 percent.
The broader market, as measured by the S&P 500 index, is up 6.8 percent so far this year.
© 2007 The Associated Press. All rights reserved.
Friday, June 29, 2007
Thursday, June 28, 2007
Developers: "Up On A Roof"
Developers are growing up
With open land in Denver's core pricey and scarce, a local developer finds a new place to build - atop an existing roof
By Margaret Jackson, Denver Post
Article Last Updated: 06/28/2007 02:38:39 AM MDT
As land in core Denver neighborhoods gets harder to come by, developer Kerry Blasdel is looking to rooftops as a solution.
Blasdel is selling the rooftop of a 102-year-old Uptown building as land. He's asking $235,000 for about 2,000 square feet on top of the building at 1760 Franklin St., which he converted into condos about two years ago.
A buyer could construct his own project on the rooftop or work with Blasdel, an architect by trade, to design and build a custom home for up to $1.4 million.
"This kind of urban prototype started in New York, San Francisco, Europe and Chicago," Blasdel said. "It gives a perception of exclusivity. It's not a typical project, and it's not going to be a typical buyer."
In London, for example, a company called First Penthouse is manufacturing homes that can be hoisted by crane to the tops of existing buildings. The penthouses are shipped complete with kitchen appliances, working bathrooms and interior decor.
The penthouse on Blasdel's project would be supported by steel columns set in foundation on the sides of the existing building. The structure would not rest on the old brick building but rather would float several feet above it.
The project would not require any zoning changes.
"This wouldn't have been possible five years ago because of prices and zoning," Blasdel said. "The fact that we have high density means that we have high land value."
At the time he purchased the building and converted it to condos, Blasdel reserved the right to develop all sides of the building and the roof.
"When builders do new developments with HOAs (homeowners associations), they typically give themselves as much leeway as possible," he said. "I also had each buyer sign a separate agreement at closing saying they understood what I was doing and they were not going to contest it."
Prudential real estate agent Barbara Mickelson, who is marketing the property, sent information on it to about 800 builders. It piqued the interest of builder Keith Shelp of Custom Design Innovations Inc.
"He's got some good plans for the layout and has had some preliminary engineering done on it, which I think would work," Shelp said. "It's an interesting concept. If you could do it reasonably without incurring more cost than it would to tear the building down and start over, I think it's something that's worth exploring."
East West Partners is pursuing a similar strategy on a project in Vail, where it will add 17 luxury units above the existing 42-year-old wood structure at Manor Vail Condominiums.
In exchange for the air rights to develop luxury condos above the building, East West will spend millions of dollars bringing the old structure up to code.
"We're running out of land, and the older buildings here are in need of code updates," said Kirk Johnston, construction manager for East West. "Paying for upgrading all fire-life safety systems and underground parking would be the cost of land if you had a vacant lot."
from the Denver Post
With open land in Denver's core pricey and scarce, a local developer finds a new place to build - atop an existing roof
By Margaret Jackson, Denver Post
Article Last Updated: 06/28/2007 02:38:39 AM MDT
As land in core Denver neighborhoods gets harder to come by, developer Kerry Blasdel is looking to rooftops as a solution.
Blasdel is selling the rooftop of a 102-year-old Uptown building as land. He's asking $235,000 for about 2,000 square feet on top of the building at 1760 Franklin St., which he converted into condos about two years ago.
A buyer could construct his own project on the rooftop or work with Blasdel, an architect by trade, to design and build a custom home for up to $1.4 million.
"This kind of urban prototype started in New York, San Francisco, Europe and Chicago," Blasdel said. "It gives a perception of exclusivity. It's not a typical project, and it's not going to be a typical buyer."
In London, for example, a company called First Penthouse is manufacturing homes that can be hoisted by crane to the tops of existing buildings. The penthouses are shipped complete with kitchen appliances, working bathrooms and interior decor.
The penthouse on Blasdel's project would be supported by steel columns set in foundation on the sides of the existing building. The structure would not rest on the old brick building but rather would float several feet above it.
The project would not require any zoning changes.
"This wouldn't have been possible five years ago because of prices and zoning," Blasdel said. "The fact that we have high density means that we have high land value."
At the time he purchased the building and converted it to condos, Blasdel reserved the right to develop all sides of the building and the roof.
"When builders do new developments with HOAs (homeowners associations), they typically give themselves as much leeway as possible," he said. "I also had each buyer sign a separate agreement at closing saying they understood what I was doing and they were not going to contest it."
Prudential real estate agent Barbara Mickelson, who is marketing the property, sent information on it to about 800 builders. It piqued the interest of builder Keith Shelp of Custom Design Innovations Inc.
"He's got some good plans for the layout and has had some preliminary engineering done on it, which I think would work," Shelp said. "It's an interesting concept. If you could do it reasonably without incurring more cost than it would to tear the building down and start over, I think it's something that's worth exploring."
East West Partners is pursuing a similar strategy on a project in Vail, where it will add 17 luxury units above the existing 42-year-old wood structure at Manor Vail Condominiums.
In exchange for the air rights to develop luxury condos above the building, East West will spend millions of dollars bringing the old structure up to code.
"We're running out of land, and the older buildings here are in need of code updates," said Kirk Johnston, construction manager for East West. "Paying for upgrading all fire-life safety systems and underground parking would be the cost of land if you had a vacant lot."
from the Denver Post
Tuesday, June 26, 2007
Home Prices to Drop Further, But Recovery May Be Ahead
By Amy Hoak From MarketWatch
It's still too early to tell exactly when this housing slump is going to end, with house prices just beginning to soften, mortgages at risk of defaulting beginning to hit reset dates and lending standards that are starting to tighten, according to researchers at the Harvard University's Joint Center for Housing Studies.
One thing's for sure: Before the sun shines again on the housing industry, a good amount of excess inventory will have to be sold, according to the center's "State of the Nation's Housing" report, released Monday. Employment growth will play a role as well in the recovery, as will interest rates, the report said.
In a telephone interview, Nicolas P. Retsinas, director of the center, said the housing industry was going through a "bumpy landing." Yet despite the severe contractions in home sales and starts seen during this correction, home prices have flattened but haven't crashed, and as a result, "we're not seeing a return to affordability," he said.
"If you were an economist, you would think that prices would have fallen precipitously," Retsinas said. Instead, home-price gains have been near flat, relative to the high appreciation rates seen over the first half of the decade -- which in many markets amounted to home price gains of 60% or more during those five years, he said.
According to the report, median house prices increased at least 10% in 2006 in 23 of 149 metropolitan areas studied; prices fell in 34 of the metros. Of the 11 metros that had declines of greater than 3%, nine were in economically depressed areas in the Midwest -- suggesting local economic trends had a greater influence on markets than national trends.
Home prices should slide further, however, according to the report. As for home sales figures, Retsinas said sales of existing homes could bottom out and begin to recover by the end of this year, with the new-home market following in 2008. The Mortgage Bankers Association also expects the market to hit its bottom at the end of the year, gradually improving from there as homes become more affordable.
And after markets burn through excess inventories, demand for new and remodeled housing will be lifted to new highs, the report predicts. In fact, if it weren't for some of the population trends -- including the influx of immigrants into the country -- the slowdown could have been much worse, said Moises Loza, executive director of the Housing Assistance Council.
The correction
Records were set for home sales, single-family starts and house-price appreciation in 2005. The next year ushered in contrasting numbers, according to the report.
Total home sales fell 10%, starts fell 13% and house-price appreciation slowed to a few percentage points in 2006. Between the end of 2005 and the end of 2006, the number of vacant homes on the market jumped more than 500,000 units, the report noted -- and that figure might even understate the overhang because some homes including seasonal or occasional-use homes might be brought back on the market when conditions improve.
Falling interest rates and unprecedented house-price appreciation started the boom, inspiring more Americans to become homeowners and more investors to buy with the intention of flipping their properties to make a quick profit. Builders tried to meet the demand, but lag time between predevelopment work and completions brought about bidding wars. "Affordability" products with lower initial payments helped more people jump into homeownership.
The study pegs the turning point of this boom in late 2005, when rising mortgage interest rates and higher home prices started forcing out buyers. Indeed, affordability remains an issue for many low- and middle-income Americans, the report pointed out, calling for a combination of structural and public policy shifts to address it.
"In just one year the number of households spending more than half their income on housing increased a startling 1.2 million to 17 million in 2005," Rachel Drew, research analyst for Harvard's Joint Center of Housing Studies, said in a news release.
Now, too, stricter standards of some lenders are having an effect on the ability of some would-be homeowners to get into the market, said Jonathan Kempner, CEO of the Mortgage Bankers Association. While products such as subprime and Alt-A loans were "controversial for some people," they did address the affordability issue for many Americans.
"Some people will have to wait longer on the margin," delaying their home buying, he said. Already, evidence of that wait is showing up in new and existing home sales, he added.
A look ahead
The report also points out the persistence of a wealth effect in 2006, which kept Americans borrowing more against their equity to support their spending. The amount of home equity cashed out set a record last year, as the volume of refinances dropped. The effect of the housing slowdown on consumer and remodeling spending hasn't been seen yet, according to the study.
Look farther ahead, however, and the outlook for housing is bullish.
For one, the baby boomers will continue to move into the age where second-home ownership is at a high. Evidence of this demographic trend has already been seen, with the sale of vacation homes hitting a record in 2006, according to the National Association of Realtors.
At the same time, children of the baby boomers will continue to move into the ranks of homeownership, boosting housing demand.
In addition, immigration is expected to hit a record 12 million between 2005 and 2015.
The upcoming growth in new households puts estimates for new-home demand at about 19.5 million units from 2005 to 2014, surpassing the 18.1 million units added between 1995 and 2004, according to the report.
It's still too early to tell exactly when this housing slump is going to end, with house prices just beginning to soften, mortgages at risk of defaulting beginning to hit reset dates and lending standards that are starting to tighten, according to researchers at the Harvard University's Joint Center for Housing Studies.
One thing's for sure: Before the sun shines again on the housing industry, a good amount of excess inventory will have to be sold, according to the center's "State of the Nation's Housing" report, released Monday. Employment growth will play a role as well in the recovery, as will interest rates, the report said.
In a telephone interview, Nicolas P. Retsinas, director of the center, said the housing industry was going through a "bumpy landing." Yet despite the severe contractions in home sales and starts seen during this correction, home prices have flattened but haven't crashed, and as a result, "we're not seeing a return to affordability," he said.
"If you were an economist, you would think that prices would have fallen precipitously," Retsinas said. Instead, home-price gains have been near flat, relative to the high appreciation rates seen over the first half of the decade -- which in many markets amounted to home price gains of 60% or more during those five years, he said.
According to the report, median house prices increased at least 10% in 2006 in 23 of 149 metropolitan areas studied; prices fell in 34 of the metros. Of the 11 metros that had declines of greater than 3%, nine were in economically depressed areas in the Midwest -- suggesting local economic trends had a greater influence on markets than national trends.
Home prices should slide further, however, according to the report. As for home sales figures, Retsinas said sales of existing homes could bottom out and begin to recover by the end of this year, with the new-home market following in 2008. The Mortgage Bankers Association also expects the market to hit its bottom at the end of the year, gradually improving from there as homes become more affordable.
And after markets burn through excess inventories, demand for new and remodeled housing will be lifted to new highs, the report predicts. In fact, if it weren't for some of the population trends -- including the influx of immigrants into the country -- the slowdown could have been much worse, said Moises Loza, executive director of the Housing Assistance Council.
The correction
Records were set for home sales, single-family starts and house-price appreciation in 2005. The next year ushered in contrasting numbers, according to the report.
Total home sales fell 10%, starts fell 13% and house-price appreciation slowed to a few percentage points in 2006. Between the end of 2005 and the end of 2006, the number of vacant homes on the market jumped more than 500,000 units, the report noted -- and that figure might even understate the overhang because some homes including seasonal or occasional-use homes might be brought back on the market when conditions improve.
Falling interest rates and unprecedented house-price appreciation started the boom, inspiring more Americans to become homeowners and more investors to buy with the intention of flipping their properties to make a quick profit. Builders tried to meet the demand, but lag time between predevelopment work and completions brought about bidding wars. "Affordability" products with lower initial payments helped more people jump into homeownership.
The study pegs the turning point of this boom in late 2005, when rising mortgage interest rates and higher home prices started forcing out buyers. Indeed, affordability remains an issue for many low- and middle-income Americans, the report pointed out, calling for a combination of structural and public policy shifts to address it.
"In just one year the number of households spending more than half their income on housing increased a startling 1.2 million to 17 million in 2005," Rachel Drew, research analyst for Harvard's Joint Center of Housing Studies, said in a news release.
Now, too, stricter standards of some lenders are having an effect on the ability of some would-be homeowners to get into the market, said Jonathan Kempner, CEO of the Mortgage Bankers Association. While products such as subprime and Alt-A loans were "controversial for some people," they did address the affordability issue for many Americans.
"Some people will have to wait longer on the margin," delaying their home buying, he said. Already, evidence of that wait is showing up in new and existing home sales, he added.
A look ahead
The report also points out the persistence of a wealth effect in 2006, which kept Americans borrowing more against their equity to support their spending. The amount of home equity cashed out set a record last year, as the volume of refinances dropped. The effect of the housing slowdown on consumer and remodeling spending hasn't been seen yet, according to the study.
Look farther ahead, however, and the outlook for housing is bullish.
For one, the baby boomers will continue to move into the age where second-home ownership is at a high. Evidence of this demographic trend has already been seen, with the sale of vacation homes hitting a record in 2006, according to the National Association of Realtors.
At the same time, children of the baby boomers will continue to move into the ranks of homeownership, boosting housing demand.
In addition, immigration is expected to hit a record 12 million between 2005 and 2015.
The upcoming growth in new households puts estimates for new-home demand at about 19.5 million units from 2005 to 2014, surpassing the 18.1 million units added between 1995 and 2004, according to the report.
Monday, June 18, 2007
Homeowner Security Alert!
How to Protect Your Home Against Lock Bumping
by Claes Bell
Imagine a method of defeating the vast majority of American locks that can be learned in under an hour, uses tools that can be acquired on the Internet for less than $50 and, if done right, can be performed in less than a minute, leaving little or no trace of a break-in.I
f you watch local news or spend time on the Internet, you may have heard alarming stories about a new way of lock-picking called "lock bumping" or "key bumping." Security experts in Europe and, more recently, the United States have declared lock bumping a clear and present danger to anyone who secures their valuables using pin-tumbler locks, which happens to include the vast majority of American houses.
But what is lock bumping? And will the possible proliferation of lock bumping really affect the average American, or is it merely another bogus, media-fueled boogeyman a la killer bees and Y2K?
What is lock bumping?
Lock bumping is a way of opening a lock using a specially filed key that is the same size and shape as the key normally used in the target lock. This special "bump" key is inserted into the target lock and then struck with a tool made of rubber or plastic. The impact of the bump key on the tumblers inside the lock temporarily pushes them up, allowing the lock's cylinder to turn. This method, if done correctly, can open a lock quickly and with relatively little noise.
"The main concern is that it is so darn easy and that you don't need any special tools or training. You only need a key, which in most cases is an easy thing to get," says Barry Wels, founding member of The Open Organization of Lockpickers (TOOOL), a Dutch locksmithing club that has helped promote awareness of the technique among government officials and consumers alike. "If you take a motivated 15- or 16-year-old and give him an hour or two and $100 to invest in tools, he can open most locks."
To know if your lock is vulnerable, just look at the key to your front door. Some of the most popular locks by manufacturers such as Schlage, Master, Yale and Kwikset may be susceptible to lock bumping. Other potential targets include recently built condos, apartments and subdivisions or gated communities, where one lock manufacturer often supplies similar locks for every house in the community. A thief would have to gain access to only one key to be able to make a bump key that would open all the locks in the neighborhood.
Fact or fiction?
How common is this technique? It's hard to say how many of the more than 2 million burglaries that occurred in 2006 involved lock bumping. But there's no denying that with millions of American homes relying on the pin-tumbler locks that are so vulnerable -- and with how-to information and tool kits readily available on the Internet -- the potential for exploitation of this weakness is huge.
"It's been spreading in Europe ever since it came out on German television in 2004," says Wels. "It became popular for burglars in Germany."
Still, says Yaron Erez, a security expert with Manhattan-based Vertex Security, the danger presented by key bumping may be overblown. The unpleasant truth, he says, is that almost all locks can be picked. Security personnel think in terms of the time and noise it takes to compromise a lock -- no matter how good the lock, it's a matter of when, not if."
If somebody knows how to bump a lock, most likely he knows how to pick a lock as well," says Erez. "Bumping is a little faster and easier than other forms of lock picking, but that's all."
Anti-pick locks
There are locks available that are resistant to all kinds of picking, including bumping. High-end locks by manufacturers such as Medeco, Schlage Primus, Assa and Mul-T-Lock are alternatives to the mass-produced, widely available locks that can easily fall prey to bumping. These premium locks incorporate more complex, multilayered locking mechanisms and patented designs that allow manufacturers to control the number of blank keys that are produced.
Electronic locks, combination locks, magnetic locks and rotating-disk locks are other choices that are immune to lock bumping. Cylinder protectors, devices that cover the front of the lock to prevent tampering, are also an option.Unfortunately, these premium locks also carry a premium price tag, especially when the fees charged by the professional locksmiths that install them are factored in. The hardware alone starts at around $100 per lock and goes up from there.
Security systems
Erez recommends upgrading your locks to a bump-proof design, but cautions against relying entirely on any type of lock.
"Locks are just one part of the total security picture," says Erez. "There are so many ways to get into a free-standing, private home: windows, garages, patio doors."
Instead, Erez recommends thinking of security in terms of providing a deterrent to potential thieves.
One such deterrent is a security system, announced by a sign in the front yard. Or even the sign with no alarm at all.
Extra lighting in key spots around the home and a family dog can also help."It's a mental thing," he says.
"If someone wants to break in, put as many things in his way as you can. He'll most likely move on to another house."
Home insurance
There is one surefire way to protect against big losses in a burglary that doesn't involve any cutting-edge equipment or security know-how: a good insurance policy. Most providers of home-owner and renter insurance will pay for a loss even if, as is the case with locks that have been "bumped," there are no signs of forced entry.
"A theft is a theft. A loss is a loss," says Mike Siemienas, a spokesman for insurance giant Allstate, "as long as it's covered under your policy.
Our policy is that you as a customer don't have to prove that someone broke into your house."
Kip Diggs, a State Farm representative, agreed. "It's very unlikely that we would reject a claim based on that."
Check your policy to make sure yours will pay regardless of how the thieves got in. For those that choose to upgrade to bump-resistant locks, it's worth a call to your insurance company to see if they would offer you a discount for installing higher-quality locks in your home.
For the record, State Farm and Allstate currently do not offer a discount beyond a generic one for deadbolt locks. According to Mike Barry, media relations director at the Insurance Information Institute, it's unlikely insurance companies would offer a premium discount for a specific brand of lock.
With little evidence available that lock bumping is common practice among thieves, the security threat to the average residence is, at this point, largely theoretical. Still, the probable spread of the expertise and tools required for lock bumping may make it a bigger concern in the future. Those most in danger may be lock makers themselves, who may one day face class-action lawsuits filed by customers angry about the possibility that some companies have known about this flaw in their products for decades -- and done nothing about it.
by Claes Bell
Imagine a method of defeating the vast majority of American locks that can be learned in under an hour, uses tools that can be acquired on the Internet for less than $50 and, if done right, can be performed in less than a minute, leaving little or no trace of a break-in.I
f you watch local news or spend time on the Internet, you may have heard alarming stories about a new way of lock-picking called "lock bumping" or "key bumping." Security experts in Europe and, more recently, the United States have declared lock bumping a clear and present danger to anyone who secures their valuables using pin-tumbler locks, which happens to include the vast majority of American houses.
But what is lock bumping? And will the possible proliferation of lock bumping really affect the average American, or is it merely another bogus, media-fueled boogeyman a la killer bees and Y2K?
What is lock bumping?
Lock bumping is a way of opening a lock using a specially filed key that is the same size and shape as the key normally used in the target lock. This special "bump" key is inserted into the target lock and then struck with a tool made of rubber or plastic. The impact of the bump key on the tumblers inside the lock temporarily pushes them up, allowing the lock's cylinder to turn. This method, if done correctly, can open a lock quickly and with relatively little noise.
"The main concern is that it is so darn easy and that you don't need any special tools or training. You only need a key, which in most cases is an easy thing to get," says Barry Wels, founding member of The Open Organization of Lockpickers (TOOOL), a Dutch locksmithing club that has helped promote awareness of the technique among government officials and consumers alike. "If you take a motivated 15- or 16-year-old and give him an hour or two and $100 to invest in tools, he can open most locks."
To know if your lock is vulnerable, just look at the key to your front door. Some of the most popular locks by manufacturers such as Schlage, Master, Yale and Kwikset may be susceptible to lock bumping. Other potential targets include recently built condos, apartments and subdivisions or gated communities, where one lock manufacturer often supplies similar locks for every house in the community. A thief would have to gain access to only one key to be able to make a bump key that would open all the locks in the neighborhood.
Fact or fiction?
How common is this technique? It's hard to say how many of the more than 2 million burglaries that occurred in 2006 involved lock bumping. But there's no denying that with millions of American homes relying on the pin-tumbler locks that are so vulnerable -- and with how-to information and tool kits readily available on the Internet -- the potential for exploitation of this weakness is huge.
"It's been spreading in Europe ever since it came out on German television in 2004," says Wels. "It became popular for burglars in Germany."
Still, says Yaron Erez, a security expert with Manhattan-based Vertex Security, the danger presented by key bumping may be overblown. The unpleasant truth, he says, is that almost all locks can be picked. Security personnel think in terms of the time and noise it takes to compromise a lock -- no matter how good the lock, it's a matter of when, not if."
If somebody knows how to bump a lock, most likely he knows how to pick a lock as well," says Erez. "Bumping is a little faster and easier than other forms of lock picking, but that's all."
Anti-pick locks
There are locks available that are resistant to all kinds of picking, including bumping. High-end locks by manufacturers such as Medeco, Schlage Primus, Assa and Mul-T-Lock are alternatives to the mass-produced, widely available locks that can easily fall prey to bumping. These premium locks incorporate more complex, multilayered locking mechanisms and patented designs that allow manufacturers to control the number of blank keys that are produced.
Electronic locks, combination locks, magnetic locks and rotating-disk locks are other choices that are immune to lock bumping. Cylinder protectors, devices that cover the front of the lock to prevent tampering, are also an option.Unfortunately, these premium locks also carry a premium price tag, especially when the fees charged by the professional locksmiths that install them are factored in. The hardware alone starts at around $100 per lock and goes up from there.
Security systems
Erez recommends upgrading your locks to a bump-proof design, but cautions against relying entirely on any type of lock.
"Locks are just one part of the total security picture," says Erez. "There are so many ways to get into a free-standing, private home: windows, garages, patio doors."
Instead, Erez recommends thinking of security in terms of providing a deterrent to potential thieves.
One such deterrent is a security system, announced by a sign in the front yard. Or even the sign with no alarm at all.
Extra lighting in key spots around the home and a family dog can also help."It's a mental thing," he says.
"If someone wants to break in, put as many things in his way as you can. He'll most likely move on to another house."
Home insurance
There is one surefire way to protect against big losses in a burglary that doesn't involve any cutting-edge equipment or security know-how: a good insurance policy. Most providers of home-owner and renter insurance will pay for a loss even if, as is the case with locks that have been "bumped," there are no signs of forced entry.
"A theft is a theft. A loss is a loss," says Mike Siemienas, a spokesman for insurance giant Allstate, "as long as it's covered under your policy.
Our policy is that you as a customer don't have to prove that someone broke into your house."
Kip Diggs, a State Farm representative, agreed. "It's very unlikely that we would reject a claim based on that."
Check your policy to make sure yours will pay regardless of how the thieves got in. For those that choose to upgrade to bump-resistant locks, it's worth a call to your insurance company to see if they would offer you a discount for installing higher-quality locks in your home.
For the record, State Farm and Allstate currently do not offer a discount beyond a generic one for deadbolt locks. According to Mike Barry, media relations director at the Insurance Information Institute, it's unlikely insurance companies would offer a premium discount for a specific brand of lock.
With little evidence available that lock bumping is common practice among thieves, the security threat to the average residence is, at this point, largely theoretical. Still, the probable spread of the expertise and tools required for lock bumping may make it a bigger concern in the future. Those most in danger may be lock makers themselves, who may one day face class-action lawsuits filed by customers angry about the possibility that some companies have known about this flaw in their products for decades -- and done nothing about it.
Wednesday, June 06, 2007
Subprime Aftermath: Losing the Family Home
'Subprime' Aftermath:Losing the Family Home
By Mark Whitehouse From The Wall Street Journal Online
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. Hollifield's concern is well-founded. Her neighbors are losing interest in their lawns because they're losing their homes -- a result of the recent boom in "subprime" mortgage lending. 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 couldn't 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 her mortgage or vacate the two-story Colonial at 5170, where she and her husband have lived for 11 years. "There's going to be no people left in Detroit if they keep doing this to them."
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 they've 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 America's 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 nation's 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 of mortgage finance 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 decade's 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 nation's 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 don't 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 I've never seen before, and I've 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 area's 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, you'd 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 federal mortgage programs or buy their homes outright. That's 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.
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, mortgage lenders 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. "You're looking at statistical distributions."
Suddenly, mortgage lenders 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 Urban Mortgage in Detroit. He says a broker's commission on a $100,000 subprime loan could easily reach $5,000, while the commission on a similar prime loan typically wouldn't 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 residential mortgage business, 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. Moore's death in 2006 scuttled the refinancing plans. Now Ms. Moore, a 56-year-old clerical worker for Wayne County, has fallen behind on the monthly mortgage payments, 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 son's baseball and basketball trophies. "I'll get an apartment," she says. "I'm not going to buy another place." An EquiFirst spokeswoman said the company doesn't 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 husband's income from an assembly-line job, and they'd 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 old mortgage and 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 wasn't 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 his mortgage to $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 I'd never done it myself."
Last year, the Michigan Office of Financial and Insurance Services revoked World Wide's 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 didn't remember the specific case but he believed the loan was properly underwritten. "My heart goes out to them," he said. "But it's not the fault of the mortgage company that put them in their loan." Mr. Arnstein now works for First Mortgage Corp. near Phoenix.
Both Ms. Williams and Mr. Walker have found themselves in a predicament now common among homeowners in Detroit: They've tried to sell their houses, but can't 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. "Nobody's 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 his mortgage debt 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, he's 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-rate mortgage. 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 can't get another loan. So she's letting the dandelions grow.
"You have two options -- to sell it or to refinance it," she says. "But if you can't do either, what can you do?"
By Mark Whitehouse From The Wall Street Journal Online
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. Hollifield's concern is well-founded. Her neighbors are losing interest in their lawns because they're losing their homes -- a result of the recent boom in "subprime" mortgage lending. 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 couldn't 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 her mortgage or vacate the two-story Colonial at 5170, where she and her husband have lived for 11 years. "There's going to be no people left in Detroit if they keep doing this to them."
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 they've 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 America's 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 nation's 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 of mortgage finance 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 decade's 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 nation's 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 don't 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 I've never seen before, and I've 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 area's 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, you'd 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 federal mortgage programs or buy their homes outright. That's 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.
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, mortgage lenders 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. "You're looking at statistical distributions."
Suddenly, mortgage lenders 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 Urban Mortgage in Detroit. He says a broker's commission on a $100,000 subprime loan could easily reach $5,000, while the commission on a similar prime loan typically wouldn't 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 residential mortgage business, 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. Moore's death in 2006 scuttled the refinancing plans. Now Ms. Moore, a 56-year-old clerical worker for Wayne County, has fallen behind on the monthly mortgage payments, 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 son's baseball and basketball trophies. "I'll get an apartment," she says. "I'm not going to buy another place." An EquiFirst spokeswoman said the company doesn't 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 husband's income from an assembly-line job, and they'd 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 old mortgage and 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 wasn't 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 his mortgage to $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 I'd never done it myself."
Last year, the Michigan Office of Financial and Insurance Services revoked World Wide's 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 didn't remember the specific case but he believed the loan was properly underwritten. "My heart goes out to them," he said. "But it's not the fault of the mortgage company that put them in their loan." Mr. Arnstein now works for First Mortgage Corp. near Phoenix.
Both Ms. Williams and Mr. Walker have found themselves in a predicament now common among homeowners in Detroit: They've tried to sell their houses, but can't 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. "Nobody's 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 his mortgage debt 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, he's 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-rate mortgage. 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 can't get another loan. So she's letting the dandelions grow.
"You have two options -- to sell it or to refinance it," she says. "But if you can't do either, what can you do?"
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