By Becky Yerak and Sharon Stangenes

Tribune staff reporters

Published March
18, 2007

 

The national subprime lending calamity first reached the
South Side graystone on Greenwood Avenue
in November.

 

That was when the homeowner, a 67-year-old widow named
Georgia Rhone, first missed payment on a mortgage that jumped from $974 a month
in 2004 to $1,850 a month last year.

 Her lender now has
begun foreclosure procedures as a result of a deal she realizes she never quite
understood but has her in a vise: a mortgage charging 11.625 percent after
being refinanced twice in two years.

 

Across the country, bad news is mounting in the subprime
mortgage business.

 

Once thriving by making loans to millions of
spotty-credited consumers who otherwise wouldn't be able to realize the
American dream of home ownership, the industry has seen an estimated 30 lenders
close shop since late 2006, amid a rise in delinquency and foreclosure rates,
felled by their own lax underwriting or by borrowers unable to keep up with
mortgage payments from 2 points to 5 points above prime.

 

In Illinois,
the percentage of subprime loans in foreclosure at the end of 2006 was 6.22
percent, up from 5.04 percent a year ago, according to the Mortgage Bankers
Association.

 

And the pain might ripple beyond the subprime lenders or
borrowers.

 

The larger real estate industry could have reason to
worry, particularly in an already sputtering market, as subprime mortgages have
grown to 16 percent of total U.S.
mortgage originations, up from less than 5 percent in 1994.

 

When loans go bad, the spillover effect on housing prices
can be significant.

 

"With delinquency and foreclosure rates continuing
to rise, this will result in more supply hitting the market throughout the
year," said a report by Credit Suisse. It estimates that the National
Association of Realtors' property inventory figures could jump 20 percent when
homes now in the foreclosure pipeline hit the resale market.

 

"These head winds will be felt throughout the entire
market," Credit Suisse said.

 

The impact begins with next-door neighbors.

 

In Chicago, a
foreclosure started on a home lowered the price of nearby single-family homes,
on average, by 0.9 percent, according to a 2006 study by the Fannie Mae
Foundation, cited in a recent report from the Center for Responsible Lending.
And each additional foreclosure started on the block cut values another 0.9
percent. The impact was highest in lower-income neighborhoods, where each
foreclosure dropped home values an average of 1.44 percent.

 

One housing watcher blames overzealous lenders for the
rise in foreclosures.

 

"Lenders are so scared about losing market
share," said Malcolm Bush, president of the Woodstock Institute, a Chicago
non-profit that studies housing.

 

Their subprime underwriting has become so
"appalling," he said, that some borrowers are defaulting on
adjustable-rate mortgages even before the rates change for the first time.

 

In Chicago,
more than 56,000 high-cost mortgages were originated in 2005, double the number
in 2004, according to figures that will be released next month in Woodstock's
2007 community lending fact book.

 

Adds Jeff Metcalf, whose Kaneville-based Record
Information Services Inc. tracks foreclosures: "We see instances where
people aren't even in their homes for a year."

 

Rhone is in danger of losing her
home after years of caring for her parents and raising two grandchildren.

 

Because of a financial crunch, she refinanced into a
subprime loan in 2005, and had to refinance it again to keep ahead of spiraling
payments.

 

Rhone said she told her broker the
monthly payment on the most recent deal he brought her was "very, very
steep for my budget."

 

"They said, 'This is the best deal' available and
that we would refinance in a few months," she said.

 

The South Side widow cared for her parents in the house
on Greenwood Avenue, where
she is now raising her daughter's children, 10 and 17.

 

Having trusted her broker and signed for a loan she says
she didn't understand, Rhone is one of a growing number
of owners trying to hang on to her home.

 

"More clients are contacting us because they are in
foreclosure," said John Groene, associate director for Neighborhood
Housing Services of Chicago, a non-profit working for neighborhood
revitalization.

 

NHS' mission has been building and rehabbing properties
in struggling Chicago neighborhoods
and educating first-time home buyers. But foreclosure prevention now eats up
about 40 percent of its time.

 

Groene supervises NHS programs in eight Chicago
foreclosure hot spots: Auburn Gresham, Back of the Yards, Chicago
Lawn-Gage Park,
North Lawndale, Roseland, South Chicago,
West Humboldt
Park and West Englewood.
Their foreclosure rates average seven times the national figure.

 

Interest rates on subprime adjustable-rate mortgages
often start at 8.99 percent, Groene said. Many have one- and two-year fixed
rates that reset to 10.5 percent or higher. The higher rate or a family crisis
often leads to a refinance, where the interest rates are higher yet. "They
are refinancing two or three times," he said. "Their interest rate is
going up each time," often on yet another adjustable-rate mortgage.

 

But it's not just struggling neighborhoods seeing
escalating foreclosures.

 

"We are seeing it across the board" in all
price ranges and in all types of communities, said Jim Rossi, who with his
wife, Sue, owns ReMax 2000 in Crete, about 25 miles south of Chicago.

 

"A lot of lenders who came into business in the last
five years applied the wrong product to the wrong buyers," Rossi said.
Buyers were "stretched into larger monthly payments than they should have
had."

 

Lending practices "were so loose that it drove
prices up, " he said. That, in turn, created a "snowball
effect." As prices rose, buyers needed larger mortgages to buy the house,
and lenders eased standards to do the deals.

 

"It was keeping up with the Joneses," said
Rossi, who expects foreclosures to keep rising based on the paperwork crossing
his desk.

 

Meanwhile, lenders and appraisers are tightening
standards and more closely scrutinizing buyers, which, in turn, contributes to
slowing sales, he said.

 

Owners with mortgage problems during the recent housing
boom were able to sell a home before losing it, Sue Rossi said.

 

But, "with the market being down the last 14 to 15
months and with market times lengthening, a lot of people who would have been
able to sell haven't been able to sell," she said.

 

In the past, even as interest rates rose, appreciating
home prices could help rescue borderline borrowers, making it easier for them
to refinance. But as the housing market lost steam, slowing price appreciation,
the increased equity of a home isn't there, reducing refinancing options.

 

"Weakness in loan underwriting is being exposed by
softening housing markets," explained Keith Ernst, senior policy counsel
for the Center for Responsible Lending, a non-profit watchdog of the
financial-services industry.

 

More than 19 percent of subprime loans originated in Illinois
in 2006 will result in the home being lost to foreclosure, the center
estimates. That's up from 13.3 percent of Illinois
subprime loans originated from 1998 to 2001 in which the home is expected to be
lost.

 

Some consumers are taking steps now to keep themselves
from slipping into the ranks of the delinquent.

 

Take Chicago
semi-retiree Charlene Snow, 69, who pays $1,150 a month for the loan on her Trumbull
Avenue home and is working with NHS to refinance
her mortgage at a fixed rate. It currently carries a 10.75 percent interest
rate and she is worried about it going higher.

 

"I had refinanced, and it was a fixed rate for two
years. And after two years, they said it would be adjustable, but at the time I
didn't understand what that meant," said Snow, whose two children and
granddaughter live with her.

 

The broker also told her that they would eventually
refinance the mortgage, which started at about $125,000.

 

Says Snow: "You don't know what tomorrow will bring,
so I'd like to be at a fixed rate so I know what I'll have to pay instead of
guessing what it might be."

 

– – –

Tips for homeowners facing foreclosure

-Ask for help as soon as possible. The longer you wait,
the harder it can be to fix the problem.

 

-Beware of anyone who promises to "keep you in your
home" or says they'll take care of everything.

 

-Ask for everything in writing. When you get it on paper,
have a lawyer, loan counselor or someone you trust look it over and make sure
the deal is what you were promised.

 

The Illinois
attorney general's office suggests those falling behind on mortgage payments
should:

 

-Look at "Predatory Home Loans: A Guide to
Prevention and Rescue Resources," at www.illinoisattorneygeneral.gov. The
Web site also lists names of reputable mortgage foreclosure counselors.

 

-Call the 311 Homeownership Preservation Campaign,
developed by the City of Chicago,
Neighborhood Housing Services of Chicago and lender partners. The 311 operator
connects you with an accredited housing counselor. Counseling is done over the
phone, is confidential and takes about 45 minutes.