Subprime pain: A spreading woe

Linda Reid-Williams is in trouble. Her mortgage payment is increasing about $200 next month, and she's worried she can't afford it.

Her plight is an example of the pressures rocking the mortgage industry - pressures rippling through the economy that contributed to last week's stock market swoon.

Reid-Williams tried for months to refinance the house she bought in Yeadon eight years ago, but recently decided against it - to avoid a $4,000 penalty for paying off her existing loan early, she said.

This is quite a contrast from two years ago. When Reid-Williams refinanced in 2005, it seemed like the lender was coming to her rescue with money she needed to pay off her car and other bills. When it was too late, she read the fine print.

"What did I just do?" she recalled asking herself.

Reid-Williams, who works as an aide to the elderly and is between jobs, is far from alone.

Lenders made nearly 48,000 high-cost, risky mortgages totaling $6.54 billion in the eight-county Philadelphia area in 2005, according to the most recent detailed federal data on home loans.

Poor, heavily minority neighborhoods in Philadelphia were not the only hot spots for subprime-mortgage loans - those given to borrowers with shaky credit records. There was also particularly fertile ground in South Jersey. In sections of Pemberton, Winslow and Willingboro Townships, half the 2005 mortgages bore a significantly higher cost for borrowers than prime loans.

In Philadelphia's Pennsylvania suburbs, Norristown, Coatesville, Darby and Yeadon had high proportions of subprime mortgages.

Many subprime loans, including Reid-Williams', had fixed interest rates for two years, but are now resetting to adjustable market rates. That means borrowers may face a 3- to 5-percentage-point jump in their interest rates, to 11 percent or more. The average rate Friday for a 30-year fixed-rate mortgage was roughly 6.37 percent.

Nationwide, about $500 billion in so-called hybrid ARMs are scheduled to reset over the next 18 months, with an average increase in monthly payments of 30 percent, according to the investment bank JPMorgan Chase & Co.

Wayne Huber of Woodbury refinanced a hybrid ARM this month that was going to start adjusting in December. Huber found a fixed-rate loan through Allied Mortgage Group Inc., of Bala Cynwyd. He is happy about it, even though his monthly payment increased $100, to $1,337, including taxes and insurance.

"Now I don't have to worry about December and getting a letter saying 'Your mortgage is going up' and it's $400 more a month," Huber said.

However, most subprime borrowers already are stretched financially and may not be able to make higher payments. On top of that, this year's adoption of tougher credit standards by mortgage lenders - and stagnant or falling house prices in most areas - are making it hard for those borrowers to qualify for new loans.

The result, according to Mark Zandi, chief economist at Moody's Economy.com in West Chester, will be a surge in defaults this year and next that could cost investors in securities backed by subprime and other risky mortgages more than $100 billion.

The accompanying rise in foreclosures is adding to the record supply of houses on the market, putting further pressure on an already weak housing market, Zandi said Thursday.

The impact already has been seen in Willingboro, where 436 houses were for sale last week, said Martha Lee Boyer, owner of Imani Realty & Associates, citing Multiple Listing Service data.

Boyer, whose business is based in Willingboro, said that in 2004 and 2005, the biggest number of listings at any one time would have been 100.

Boyer said that while she continued to see home buyers who were trading up, "we're still seeing more and more distressed sales."

In 2005, more than half - 1,409 of 2,716 - of the mortgage loans made in Willingboro were high-cost loans, based on a federal benchmark.

The three top lenders there were Fremont Investment & Loan, with 138 loans worth $18 million; Option One Mortgage Corp., with 90 loans worth $13 million; and New Century Mortgage Corp., with 90 loans worth $12 million. Fremont - ordered by federal regulators in March to tighten loan policies - and Option One are being sold at steep discounts, and New Century went bankrupt.

Mortgage brokers and real estate brokers attributed subprime lenders' big market share in Willingboro to high turnover and the presence of many working-class families without much financial sophistication.

"I just think there's a big opportunity for mortgage lenders to take advantage of people who are not fully tuned in to what they are doing when they do it," said Joe Di Leo, a partner in H.L.F. Mortgage Services Inc., of Riverton.

Reid-Williams offered herself as an example of not fully understanding what she had agreed to in 2005.

"When I did a two-year adjustable, I knew there was a penalty if I got out too quickly," she said. But she said she did not believe until recently that the penalty was in effect for three years.

"I'm laughing because that's what I have to do to stay sane," she said as she told her story.

Now, her payment, including taxes and insurance, is going from $1,172 to more than $1,300. She could not say exactly what the payment would be.

"I'm just going to try to see how I can go on with it," she said.