A Dream Foreclosed: Residents of the Region Are Losing Their Homes In Record Numbers
Foreclosures caused by bad choices, the allure of low interest rates and predatory lenders
June 7, 2004
Pittsburgh Post-Gazette
The cleaning crew and real estate agent arrived early. An Allegheny County Sheriff's deputy was there, too, watching Joyce and Konrad Schachner run back and forth from their North Side home of five years to the U-Haul truck that now carried their lives.
"Why are the cops here, Mom?" asked 5-year-old Konrad Jr., standing wide-eyed in front of his house on Van Buren Street.
"Because we gotta go," she answered. "I told you, we gotta go."
And within 45 minutes the Schachners were gone, driving to a relative's home for lack of other options. In the wake of their eviction, everything they decided to leave behind -- toys, furniture, clothing -- had been discarded.
"I'm not bitter," Joyce Schachner said. "I knew it was coming for a while."
In fact, it was three years coming, a process that included several tax liens, two bankruptcies and foreclosure that led to the county's sheriff's sale of their home and their eviction.
Around the city, region and country, scenes similar to the Schachners' have been occurring with staggering frequency in the past few years. Although eviction is usually the final act, it is only one part of a trillion-dollar drama of economics, lending practices, demographics and greed that revolves around a single, common protagonist: the homeowner.
Home ownership has long been central to the American dream. It is the primary way that families build wealth. It strengthens neighborhoods and raises property values. It keeps capital in communities and attracts outside investments.
But during the past decade a combination of factors -- some good, like the lowest mortgage rates in four decades, and some bad, like the growth of personal credit problems -- have produced record foreclosures.
Exactly how many of the country's 73 million homeowners have been foreclosed on is hard to pin down. There is no industry-wide repository of residential foreclosure numbers, and no government agency requires such reporting. But this much is clear: The rates of foreclosure of all residential loans increased during the last quarter of 2003.
The National Consumer Law Center, a Boston-based nonprofit consumer organization, conservatively estimates the number of residential foreclosures pending nationally at the end of 2002 at 677,000, a number roughly equivalent to the population of Baltimore.
Pennsylvania has the seventh highest foreclosure rate in the country, a ranking fueled by the state's weak economy, increased taxes, the costs associated with maintaining old homes and a quantum jump in access to credit.
Allegheny County is in the throes of its worst foreclosure crisis since the early '80s when the bottom fell out of the steel industry. Last year, the county foreclosed on a record 4,147 homes; this year, the number is on track to surpass 4,700. An additional 2,000 homeowners will lose their residences because of judgments or overdue taxes.
Generally, the legal process of foreclosure begins after nonpayment of taxes or when a homeowner misses three mortgage payments and the loan is considered in default. In Allegheny County, even if a homeowner does nothing to forestall the process, it can still take at least six months before eviction occurs, and, depending on court filings and appeals, it can take longer than six years.
And foreclosure is not inevitable. Up until an hour before the public sale begins, homeowners can file a Chapter 13 bankruptcy petition, which allows them to keep their house by making regular mortgage payments and developing a three- to five-year plan for repaying debt.
SHERIFF'S SALES
In Allegheny County, sheriff's sales are all-day affairs held the first Monday of the month where speculators compete with attorneys representing mortgage lenders to buy hundreds of foreclosed homes for a fraction of their worth. In the case of the Schachners, their $36,700 North Side home near Ross was sold to a discount consumer credit company for about $9,800.
In all but a handful of cases, attorneys representing the lenders win the bidding. Lenders ultimately resell the foreclosed homes to recoup the loan the borrower used to buy the house.
The number of houses available at the county's sheriff's sale have increased more than 500 percent since 1996, from 1,120 to an estimated 7,000 by the end of this year. That's the equivalent of all homeowners in the Pittsburgh neighborhoods of South Oakland, Polish Hill, Stanton Heights, Manchester, Lincoln Place and East Carnegie losing their homes in a year.
At today's June sale, nearly 1,000 homes are up for sale.
So many homes were being sold in Philadelphia earlier this year that a two-month moratorium on sheriff's sales was declared. No such action is expected here.
"It's a big issue [and] I'm very concerned," said Dan Onorato, Allegheny County's chief executive, who blames the county's past two property reassessments in part for triggering the current crisis.
"The foreclosures are bad for neighborhoods and they're bad for the homeowners in this county."
He has vowed to force school districts and municipalities to offer homestead exemptions and senior citizen discounts to property taxpayers. Unless such protections are in place, he said, he would petition Common Pleas Judge R. Stanton Wettick Jr. to block the county's next property assessment, scheduled for 2006.
FORECLOSURE TRENDS
There are reasons to think the foreclosure trend will continue.
In 2002 and 2003, lenders nationally originated $5.7 trillion in loans; in other words, 81 percent of all current mortgages were taken out during those two years. A big reason for such robust lending: Until recently, mortgage rates were at 40-year lows. As interest rates moved downward, home prices moved up. Borrowers' loans were bigger, which meant bigger monthly mortgage payments.
More and more people sought to own homes or pay off existing debt. But some consumers' credit was not good enough to qualify for conventional, or prime, loans. As a result, they agreed to nonconventional, or subprime, loans, which allowed them to refinance their debt, albeit with higher fees and higher interest rates.
Most often, these subprime loans are in the form of debt consolidation or remodeling loans. Through these home equity loans, homeowners substitute the unsecured debt of their credit cards with the secured debt of their homes. While the perception is that a home equity loan provides tax savings -- the lower interest rate is deductible -- the reality is that the money is lent for a greater length of time, costing the home-owner more.
The peak default time for loans is three to five years after origination. That means that between next year and 2007, with the huge number of loans taken out in the past two years, even more could end in foreclosure.
Other factors have been in play. The number of single home buyers has increased to the point where they soon will outnumber couples, a significant trend because of single buyers' poorer ratio of income-to-debt. The number of households headed by divorced people with single incomes also has risen, and consumers' unsecured debt grew from $222.6 billion in 1990 to more than $600 billion in 2000. The result was a record increase in personal bankruptcies to more than 1.5 million in 2003.
SUBPRIME LENDING
Many observers blame the subprime market for the current foreclosure crisis. Subprime loans are legal; they are for borrowers with limited incomes or with poor or no credit histories. Originally a positive way of bringing needed credit to underserved communities, they have become the primary source of credit in certain areas. They make up 10 percent of all residential mortgages, although the majority of them -- 61 percent -- are undertaken to refinance debt.
Their growth has been phenomenal. In 1994, they generated $34 billion in loans. By 2003, that figure was nearly 10 times higher: $332 billion. It also has meant a jump in employment and earnings for the mortgage brokers initiating the loans. U.S. Bureau of Labor statistics show the number of mortgage and nonmortgage loan brokers more than doubled between 1998 and 2003, and last year, mortgage brokers' earnings were up 78 percent.
But while only one in 100 conventional loans ends in foreclosure, one in 12 subprime loans do. In their 2003 book "The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke," Harvard law professor Elizabeth Warren and her daughter, Amelia Warren Tyagi, compared subprime loans to defective toasters, writing that if one in 12 toasters had a chance of blowing up, the American public would not stand for it. Why, they wrote, should it therefore be acceptable for an industry to market a product with an 8 percent expectation of failure?
All subprime loans are not predatory loans -- those that take unfair advantage of a borrower through excessive fees, rates, fraud or deception. But all predatory loans are subprime loans.
Studies have revealed a relationship between the level of subprime lending in a neighborhood and subsequent foreclosures there. The U.S. Department of Housing and Urban Development found that a disproportionate percentage of subprime loans are made in low-income neighborhoods and are five times more likely in African-American ones than predominantly white neighborhoods.
The extent of predatory lending nationwide is unknown because of the lack of reliable data. Nevertheless, according to a recent General Accounting Office study, there are indications that it is prevalent. Among those indicators are recent legal settlements.
Two years ago, the attorneys general from several states were successful in negotiating a $484 million settlement with Household International Inc. regarding its mortgage lending practices. About $30 million of the settlement went to Pennsylvanians.
Since 1998, the Federal Trade Commission has brought charges in 13 cases against subprime lenders involving $320 million in fines and restitution.
"The starting point is to make sure lenders are truthful," said Howard Beales, director of the agency's Bureau of Consumer Protection. "There are misrepresentations about what the deal really is, and that's letting consumers get in trouble."
The Schachners' troubles began when they took a relative's advice and got their home mortgage in 1999 with The Associates, then one of the nation's largest subprime lenders. A year later, Associates was bought by Citigroup and merged with CitiFinancial Credit. Citigroup paid $215 million in 2002 to resolve Federal Trade Commission charges that its Associates subsidiaries engaged in systematic and widespread deceptive and abusive lending practices.
Joyce Schachner, a food service employee, and her husband, who works odd jobs, made a $1,500 downpayment on his grandparents' home -- a two-bedroom, one-bath, 1,080-square-foot frame structure. The $44,900 mortgage came with 15 percent interest, about twice the market interest rate at the time. Although she knew their monthly mortgage would be $456, the couple didn't realize there also would be more than $1,000 annually in property taxes.
Schachner, 40, said they immediately fell behind in their bills. In 2001, they filed Chapter 13 bankruptcy, which allowed them to keep the house and establish a debt repayment plan through a trustee appointed by the bankruptcy court. Two years later, the Schachners were forced to file Chapter 13 again, but this time they couldn't afford the payments.
They failed to pay municipal taxes for three years and by the time they contacted The Associates to work out a payment plan, it was too late.
"[Associates] wanted all the back pay right away," Joyce Schachner said. "There was no way."
There is an emergency program for Pennsylvanians whose homes are being foreclosed. The Homeowner Emergency Assistance Program, part of the Pennsylvania Housing Finance Agency, was created in 1983 in the wake of the steel mill closings throughout the Mon Valley which left thousands of newly unemployed mill workers unable to pay their mortgages.
Program recipients receive loans to help pay delinquent mortgages, and they may qualify for continuing monthly assistance of up to 24 months or $60,000. In 1996, 5,884 households applied for mortgage assistance and 1,657 received aid. Last year, there were 8,944 applications and 2,298 approvals.
"It's a national problem," said A. William "Bill" Schenck III, the state's Secretary of Banking and chairman of the housing finance agency. "We happen to be one of the largest from a percentage basis."
While Schenck laid blame for "a significant portion of the problem" on unscrupulous lenders, part of the problem rests with "individuals borrowing to get into a house before they were ready."
Schenck's office expects to complete a statewide study by December on predatory lending, including "action steps" for legislation monitoring mortgage brokers, increasing the agency's enforcement capabilities and working more closely with financial counseling agencies.
Nationally, there are about 50 local and state laws governing subprime lending, which lenders grumble raise compliance costs. Instead, lenders favor a federal law to supersede previous legislation. But any action on two such bills now in Congress is unlikely this year.
For the Schachners, they picked life back up in a small North Side apartment off California Avenue that they rent for $350 a month. Konrad Jr. is happy, Joyce said, because his new room is bigger. And she's relieved that the anguish of their foreclosure and eviction is over.
"It got to be too much after a while," she said. "I'm just glad that we're all safe and healthy.
"You make your own messes. You have to clean them up, too."
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