Caught in the subprime lending pinch

Plights of three borrowers reflect shifting terrain for home ownership

In 2005, Patricia Jones pulled her four grandchildren out of the neighborhood in Mattapan where they lived because she worried about crime in the area. Jones, who assumed custody of the children, ages 4 to 17, from their mother, has been steadily employed at NStar, the utility company, since 1977, rising from keypunch operator to customer service representative. She sold her three-decker in Mattapan, purchased in 1998, for a smart profit and put $55,000 down on a $555,000 house in Quincy located 100 yards from the grade school two of her grandchildren now attend.

A second daughter, Keysha Jones, agreed to move in and share child care and bills. "We were both desperate," said Keysha Jones, whose two children are handicapped.

Unfortunately, Patricia Jones's timing couldn't have been worse. She bought her new home at the very height of the nation's six-year housing boom, in one of the most expensive real estate markets in the country. The median sale price of a single-family home doubled in Massachusetts between 1999 and 2005, as panicked buyers bid more and more for scarce homes.

In past booms, people with poor credit scores, large debts, or modest incomes would have been shut out of the action. But in recent years, a new breed of mortgage company, the subprime lender, exploded onto the scene. Rather than deny loans to people with less-than-stellar credit, subprime lenders charge higher interest rates to compensate for the risks associated with the loan. The subprime market -- which grew from nothing to a $600 billion-a-year business in 2006 -- brought the American Dream to a larger slice of the population than ever before.

But the price, for many, was too high. More than half of the record 20,000 Massachusetts homeowners who received foreclosure notices from lenders last year had subprime loans. Federal loan data show that nearly half of Latinos and African-Americans who bought homes in Massachusetts in 2005 financed their purchases with subprime loans.

When she applied for her subprime mortgage, Patricia Jones obtained credit reports showing scores of 657 to 679, high enough to qualify her for a traditional mortgage; most lenders require scores above 620. But her record was marred by a filing for bankruptcy protection early in the decade. Even though her financial affairs were in order when she bought the house, personal bankruptcy remains on an individual's credit history for seven years, warning lenders away. Because of the filing, Countrywide Home Loans, which makes both conventional and subprime loans, rejected Jones even for a subprime mortgage. Countrywide's salesman referred her to a local broker for California-based New Century Financial Corp.

Federal and state regulators, testifying at recent Beacon Hill and Capitol Hill hearings on the subprime lending crisis, have said many lenders overlooked customers' financial problems to make another loan. Jones, who has owned three houses in her lifetime, appeared to be a solid customer: Her monthly income, according to her 2004 tax filing, was about $5,250. But a copy of the loan application signed by New Century's loan broker in Massachusetts -- and not by Jones -- reported it at $7,500. Jones, who was surprised to learn about the discrepancy, said, "They had all my W-2s."

The broker worked for a firm called Hi-Tech Funding. The company's license lapsed in 2006 after two years of operation, the Massachusetts Division of Banking said. The broker did not return calls to his home, and California telephone numbers for the company were disconnected.

For privacy reasons, New Century said it would not comment on any customer's loans, but in a written statement to the Globe it said it encouraged borrowers "experiencing problems making their loan payment to contact the company."

New Century, whose stock traded at more than $50 a share a year ago, is struggling amid the subprime market's collapse. The nation's second-largest subprime lender in 2006, New Century filed for bankruptcy protection this week after its bankers and investors shut off financing as delinquencies in its mortgage portfolios mounted. At least 30 subprime lenders nationwide have halted operations, gone bankrupt, or sought buyers this year as defaults on subprime mortgages increase.

Jones is current on her payments, but anxious. Over the first four years of the loan, the interest rate will rise to more than 12 percent from the current 6.7 percent, according to the documents. A September 2008 increase will drive her payments up $500, to $3,712, the disclosure statement said, and they will rise again, in 2009, to $4,263.

Drawing hard on a cigarette holder to curb her desire to smoke, Jones said she knew the payments would increase. But Jones, a high school graduate, said she was banking on lower payments once she refinanced with a fixed-rate mortgage -- just like the loan for her triple decker.

But this time the market did not cooperate, and appraisals fell short of what Jones would need to refinance. "I overpaid for my house," she said.

Ivan and Christine Estrada could not afford the mint-green saltbox they bought in Winthrop for $315,000.

At age 17, Ivan Estrada came from Colombia and moved in with an aunt and uncle in Chelsea. At 21, he married Christine Stevens from East Boston. The couple rented for years in Winthrop before buying their first home in January 2006. Ivan Estrada speaks basic English but cannot read it well, so his wife translated, with difficulty, the terms of the mortgages he would sign.

Two loans from Atlanta-based SouthStar Funding LLC -- whose operations in Massachusetts were halted by state regulators yesterday -- financed the home's full price. The rate on the primary loan for $252,000 started at 9 percent and, after two years, could increase. A second mortgage of $63,000 was written at a fixed rate of 12.9 percent. At the time, the national average interest rate on a 30-year, fixed-rate mortgage was 6.12 percent.

Within months of buying, the couple's $2,918 monthly payments depleted their small cushion of savings. Ivan Estrada got a second job, but Christine Estrada , who recently completed training as a medical assistant, is looking for part-time work.

On the loan application, his income was listed as $6,500 a month, but pay stubs from his full-time job at a rental-car company show he earned about $2,200 a month there last year, excluding overtime.

The Estradas said they learned about the inaccuracy only when a friend, Boston lawyer Maria Banciforte , reviewed their original loan documents after the Estradas were rejected by at least three major lenders for refinancing they sought to reduce the payments. "Why didn't I catch that?" Christine Estrada said.

Subprime lenders across the country loosened their standards significantly at the tail end of the housing boom in an attempt to continue to write new loans and generate commissions. Loans with no down payments and applications that required little or no income verification became more common by 2006; many lenders spent little or no effort verifying the numbers reported on applications by checking customer's incomes against tax returns or other financial documents.

Prime Mortgage Financial Inc. in Southborough, which served as the broker for the Estrada loan, said it has a signed application from the borrower. In business over 20 years, Prime is "very careful in terms of how we conduct our business," said Aris Pappas, president. Prime's loan salesman, Scott McLaughlin, said he tried to talk the couple out of the loan. "I told them at the time that I thought it was going to be unaffordable, but she also said she was going to be back to work soon," he said.

Executives at the lender, SouthStar, did not return several calls for comment.

Christine and Ivan Estrada disputed McLaughlin's version of events. McLaughlin "said we would be able to refinance in six months" if they paid the loan on time and "made us feel so secure that it would happen," Christine Estrada said.

That strategy could have worked, if home prices had kept going up. Homeowners who bought early in the boom were able to take advantage of the increasing value of their homes by refinancing their mortgages. Because they had built up "equity" -- the difference between the size of the mortgage and the value of the home -- conventional lenders were eager to refinance their mortgages and lower their monthly payments. But the refinancing option dried up last year for homeowners who purchased homes just as values began declining.

The couple missed their February and March payments, but they have not yet received a foreclosure notice. If they are unable to save their home, they and their three children -- two boys, ages 12 and 19, and an 8-year-old girl -- will rent again. They will also have to contend with the fallout from foreclosure. "Now our credit's ruined," Christine Estrada said. Even selling the home might not solve their financial problems; the real estate website Zillow.com estimates the value of their property at $302,000, which is not enough to pay off their loans.

When Angela Mitchell refinanced her subprime loans with a new subprime loan, the single mother's fate was sealed. Nearly two weeks ago, a judge gave her until May 1 to vacate her Dorchester condominium, which was seized in foreclosure. Her 11-year-old son, Aaron, already has packed his belongings into boxes in his bedroom.

Mitchell, 42, has a steady, well-paying job driving a subway train on Boston's Red Line for the MBTA, where she has worked for two decades. She thought about seeking a credit union loan or bank mortgage for the $245,000 condo she bought in 2005. But, like many homebuyers facing a daunting number of banks, brokers, and mortgage companies, she instead relied on a referral from someone she trusted, an acquaintance at her church who suggested a broker. Mitchell obtained two loans from New Century's broker in February 2005. The combined payments started at $1,705 but would have risen this month to $1,902 if the primary loan's "teaser" interest rate, 5.9 percent, surged to 7.4 percent, her loan said.

Subprime loans with low teaser rates in the first two years of the mortgage were widespread. Basing their calculations on the lower-cost introductory rates, lenders qualified borrowers to purchase more expensive homes than they otherwise could afford. No one ran the numbers to determine whether borrowers such as Mitchell could afford the higher monthly payments that would come due later in the mortgage; it was often assumed by all parties that the homeowner would refinance before the bigger payments came due.

A year ago, feeling burned by her first loan salesman, she found a new broker through a friend and refinanced into a single mortgage, borrowing an additional $28,000 to help pay other debts. Her friend, Mitchell said, "thought he was helping me out."

Mitchell's new loan, with Encore Credit Corp., increased her payments $700 a month to $2,401. It carried an initial rate of 9.4 percent, with a maximum rate of 14.4 percent over the mortgage's life, according to documents.

Secretary of State William F. Galvin said last week that situations such as Mitchell's, with multiple loans digging the borrower into a deeper financial hole, were common in the subprime business. "A new lender comes in and rescues the homeowner for a short time," Galvin said. "Then they're in trouble again."

Mitchell used more than half of the $28,000 in cash she received from the refinancing to pay other debts. She reasoned that by paying other bills, "I would have more money to pay for my mortgage," she said.

In hindsight, Mitchell said, "It was a dumb move."

Kimberly Blanton can be reached at blanton@globe.com.