American dream turns sour in loan squeeze

By Adam Geller

updated 7:11 p.m. ET Aug. 31, 2007

THORNTON, Colo. - The lights are still on inside Foreclosure No. A200642668 — so while there’s time, have a look around.

Here’s the living room, still covered in the worn blue shag Angela Sneary always intended to replace with the sheen of hardwood. And downstairs, through a curtain of plastic beads, is the basement where husband Tim was going to knock out a wall and put in a foosball table.

Step this way and the Snearys point out the places where they never could find the cash to hang a ceiling fan, install a hot tub, replace the siding ... a long list of abandoned ambitions that seem almost too big to squeeze into the modest four-bedroom tri-level.

Owning a home is all about finding humor in unfinished projects. But the Snearys never had the luxury.

They ran out of money first, then time. Soon, they’ll almost certainly be out of a home.

Buying a home is the American dream.

Many families, though, likely never would have become owners if not for the tremendous growth a new kind of mortgage business called subprime lending. It long seemed like a winning proposition for all parties. Now the costs are becoming apparent — and they are very unsettling.

Subprime lenders peddle new kinds of mortgages, often requiring no money down and made at “teaser” interest rates that soon rise. They target marginal borrowers with weak credit. By last year, subprime loans made up 20 percent of the market for new mortgages.

But as the housing market cools, thousands of subprime borrowers are struggling to keep their homes. Clearly, this isn’t how the American dream is supposed to play out.

The experience of families like the Snearys show how the squeeze created by questionable lending can quickly be compounded by family economic crises, a lack of planning and knowledge, and the rapid shifts in a real estate market that once seemed unstoppable.

A tough deal
The Sneary family grew fast — a girl, a boy and then another boy in four years. Tim found work doing landscaping in Denver’s mushrooming subdivisions. Angela got a job working for an insurance company. Eventually, they combined to make around $55,000 a year.

In 2004, the couple set out to look at homes in Thornton, a fast-expanding, mostly working-class suburb 20 minutes outside Denver.

They loved the second house the agent showed them, painted glowing pink with a big shade tree out front. The kitchen drawer-pulls were shaped like tiny forks and spoons. It had plenty of space for three kids, three dogs and six cats.

It cost $204,000. “We thought we were getting a deal,” Tim says.

The agent said he’d find them a mortgage, no money down. They never thought to shop around.

Agent Kent Widmar says he has no memory of the couple or the deal. But he knows his customers — and subprime loans are the only loans most can get.

“I kind of work the bottom of the market, the tough deals, the people that can’t get credit anywhere,” Widmar says. “You’re dealing with people where nobody else (other lenders) is even going to talk to them ... It’s not like you have a whole lot of choices.”

The Snearys say they expected to borrow at a fixed rate of 6.5 percent. That would put monthly payments at about $1,290, a little more than rent.

But at the closing, all the numbers were higher. The Snearys were offered two loans, both from a Texas subprime lender, Sebring Capital Partners. The first, for 90 percent of the purchase price, was at 8.31 percent, set to adjust after two years. The second, for the remainder, was at 13.69 percent.

The house would cost $1,623.80 a month to start — and it was almost certain to rise.

Looking back, Tim wishes they’d asked more questions or considered walking out. But everything was in boxes, and they’d given notice. So they eyed each other nervously, and agreed to work more hours. Then, they signed the papers.

A new system
The mortgage business has changed considerably.

"When we were children, the lender was a savings and loan — just like in 'It’s a Wonderful Life,'" says Oliver Frascona, a Boulder, Colo., attorney whose firm represents many lenders in foreclosure proceedings, including the Snearys’. “The lender was loaning their own money ... so they were very careful with how they lent it.”

Today, many buyers find loans through a mortgage broker. Many of those loans — certainly subprime loans — come not from local banks but from loan originators. These companies hold the loans briefly before reselling them, usually to an investment bank, earning a profit and passing along the risk. Then the loans are bundled and resold as securities to investors.

The new system works well in many ways, but the incentives driving the players are very different. The mortgage broker and loan originator, rather than being restrained by risk, pursues the profit that is the reward for generating new business. An enthusiastic Wall Street provides cash for yet more loans.

But the willingness to downplay risk turns a business of caution into a hedged bet. Often, buyers qualify for these loans only because they can afford payments at the introductory rate, without considering how they’ll make good once the rate goes up.

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