Effects of a decade of aggressive lending

Domeeka Lawrence never imagined spending the rest of her life in the Southwest Philadelphia house she bought in June 2003 for $66,900.

"I wanted to fix it up and move out" so she could lease the rowhouse in the Elmwood neighborhood to others, the 36-year-old mother of three said.

Next month, she is probably going to move, but not to make room for renters. The house is scheduled for a sheriff's sale May 1.

Lawrence, who fell behind on her mortgage payments after losing her job at a Rite Aid store in November 2004, is one of thousands of borrowers behind the recent Wall Street-rattling collapse of some of the biggest lenders to people with weak credit.

Lawrence, like many low-income borrowers, got something she wasn't expecting in her adjustable-rate mortgage: The monthly payment jumped in July 2005 from $387 to $514.

"I asked at the settlement table, 'Is this going to be my payment?' " Lawrence said last week, showing a reporter a schedule of payments in her truth-in-lending statement that went little above the original $387 over the life of the loan.

"I rushed into that without really thinking. I should have done a lot more research," said Lawrence, who has considered filing for bankruptcy to stave off the sheriff's sale, but doesn't have the money for a lawyer.

Lawrence's story is typical of borrowers with blemished credit histories or not enough cash for a down payment. They agree to high-cost loans they don't understand, often enticed by "teaser" rates that make the loan seem affordable.

Such so-called subprime loans exploded in popularity over the last five years, from 918,557 loans nationally in 2001 to 3,220,000 last year, according to the Center for Responsible Lending, a research group in Durham, N.C.

Voracious Wall Street demand for debt securities based on subprime loans pushed mortgage companies to make loans with little regard for the ability of borrowers to repay them.

The lending frenzy ended last winter, when delinquency rates on such loans soared, and Wall Street banks cut off funds, forcing more than two dozen subprime lenders to close up shop.

New Century Financial Corp., the nation's second-largest subprime lender, filed for bankruptcy protection Monday, fanning fears that subprime problems could shake the broader mortgage market. In the Philadelphia region, New Century was the third-largest lender of subprime mortgages in 2005.

The subprime-mortgage meltdown is hitting other metropolitan areas, such as Detroit and Cleveland, harder than Philadelphia, but local experts said aggressive lending in Philadelphia's low- and moderate-income neighborhoods had been a serious problem for at least a decade.

Today, the Reinvestment Fund, a Philadelphia nonprofit group that finances housing and commercial development in low-income areas, is publishing a study of mortgage foreclosures in Philadelphia from 2000 to 2003, a period when problems with subprime mortgages led to a spike in foreclosures.

The analysis of 15,000 foreclosed properties found that 14 percent of those with multiple mortgage refinancings had been affected by predatory lending. There is no widely agreed upon definition of predatory lending, but it generally involves a series of high-cost refinancings that lead to a loss of homeowner equity.

Ira J. Goldstein, the author of the study, "Lost Values: A Study of Predatory Lending in Philadelphia," said it was not enough that the market eventually would sort itself out, because the cost to families and neighborhoods was huge.

"People are relentlessly pursued" by lenders, Goldstein said.

That's what happened to South Philadelphia residents Dorothy and Emmanuel Santos.

Since July 2005, the couple's monthly mortgage payment has spiraled from $237 to $674 through a series of three loans meant to fix up the house inherited from Emmanuel Santos' mother. Their debt has soared from about $13,000 remaining on his mother's mortgage to $90,000 on the current mortgage. Santos, 53, said he has continued to get calls at least daily from lenders offering to refinance their mortgage.

The basement of their South Philadelphia rowhouse still leaks, and, when the "teaser" rate on the current loan expires in two years, the couple's monthly payment will jump to at least $860, or more than half their monthly fixed income when taxes and insurance are included.

Beth Goodell, a senior attorney at Community Legal Services of Philadelphia, who is familiar with the Santoses' situation, said that what they have gone through was typical of what she has seen in Philadelphia.

Mortgage brokers do not exactly deceive borrowers, Goodell said, but they mislead them in small ways. What it often comes down to, she said, is the borrower's trust: "Why would they give me a loan if I couldn't afford to pay it?"

Santos is exasperated, but remains hopeful.

"In my mind, right now, we've got one more chance to refinance. . . . If we don't have credit card debt, maybe somebody will give us a fixed rate."

Hearing that made Goodell, who was present during an interview, cringe. "Don't do that before talking to us," she urged.

Domeeka Lawrence, too, is optimistic, despite the fact that she's unemployed and likely to lose her house in a month. She still dreams of investing in real estate. "If I ever buy another house," she said, "I'm going to do this so differently than I did with this house."