American dream, Pennsylvania nightmare
Foreclosures have jumped due to high-interest "subprime" loans, a state report says. 55,000 families lost homes from 2000 to '03 in sheriff's sales.
By Joseph N. DiStefano
Inquirer Staff Writer
Easy credit has made the American dream of buying a home easier for poor and minority families.
But keeping a home hasn't gotten any easier: More and more low-income Pennsylvanians who took on high-cost mortgages - in cities and suburbs - aren't making their payments and are losing their homes, according to a state-funded study of home foreclosures.
Two of every five mortgages made in Philadelphia by high-interest "subprime" lenders in 1998 and 1999 had resulted in defaults and foreclosures by 2003, reported the Reinvestment Fund, a nonprofit Philadelphia-based lender which conducted the study for Pennsylvania Banking Secretary A. William Schenck III.
"Increased consumer access" to mortgages with low down payments and loose credit requirements has boosted home ownership, especially in low-income and minority communities, since the 1990s. That has driven up home ownership rates, which now stand at more than two-thirds of all American households and more than 70 percent of Pennsylvania households, the study noted.
"The negative side of this growth, however, is the associated rise in delinquencies and foreclosures that arise from riskier subprime" loans, according to the report, written by a team of analysts headed by Ira Goldstein, director of the fund's policy group.
Foreclosure rates are up around the country, due partly to consumer ignorance and to Wall Street's growing demand for mortgages, the report said. The mortgage buyers - mutual funds, pension plans, and other professional investors - are willing to tolerate losses from some subprime borrowers as long as interest charges for other borrowers more than make up the difference.
But in Pennsylvania, weak state regulation and "abusive lending practices" have given the state "some of the highest mortgage foreclosure rates in the nation," the study concluded.
Pennsylvanians are generally wealthier, less likely to be out of work or divorced, and have better credit ratings than most other Americans - which ought to make them better able to pay their bills, the study said.
The banking secretary met with key legislators in Harrisburg to discuss the study yesterday. Schenck said it was "too early" to say what changes in state law or regulations might be attempted as a result. He plans a public presentation today.
There has been a sharp rise in foreclosures, not only in parts of Philadelphia, but also in minority and modest-income communities across the state, coinciding with an increase in subprime mortgage lending since the mid-1990s, according to the study.
Among the findings:
Subprime loans account for just one in 10 of all Pennsylvania home mortgages, but two-thirds of foreclosures.
Sheriff's sales, which often result from foreclosures, were up 14 percent in Pennsylvania from 2000 to 2003. An estimated 55,000 Pennsylvania families lost homes that way during that period, more than the total number of households in any Pennsylvania community except Philadelphia or Pittsburgh.
Rising medical fees, property taxes and energy costs are helping drive Pennsylvanians out of their homes: The number of personal bankruptcy filings in the United States doubled during the 1990s, but tripled in Pennsylvania.
Foreclosure filings rose 33 percent, from 15,610 in 2000 to 20,834 in 2003, in 13 counties that are together home to most Pennsylvanians.
Philadelphia and Allegheny Counties accounted for half the total. Foreclosures also rose rapidly in Delaware County (up 36 percent, at 1,700), where most home losses were reported in older communities along the Philadelphia border and in Delaware River communities, such as Chester.
Total foreclosures rose more slowly in Bucks County - but more than 70 percent of subprime loans recorded in Bucks ended in foreclosure, nearly twice the rate as in Philadelphia and among the highest rates in the state.
Foreclosures in Bucks, as in Delaware County, were concentrated in lower-income communities such as Bristol; the same held true for Norristown and Pottstown in Montgomery County, and Coatesville in Chester County.
Overall, Pennsylvania foreclosure rates have jumped tenfold, from just 0.15 percent at the end of the 1970s to 1.5 percent in 2003.
For conventional mortgages - 90 percent of new Pennsylvania home loans - the state ranks ninth in the country for foreclosures, at 0.85 percent of total loans. But for high-rate subprime loans, which account for 10 percent of Pennsylvania home loans, Pennsylvania ranks fourth, with 11.94 percent foreclosed each year.
On both lists, Pennsylvania ranks with less-developed states such as Mississippi and Kentucky; among large industrial states, only Ohio residents are more likely to lose their homes than Pennsylvanians.
Harrisburg lawmakers and lobbyists have been anticipating the study since Schenck ordered it last year, and that it will be accompanied by a push for legislation designed to rein in abuses.
Traditionally, the fear of losses kept banks from lending to people with bad credit. Since big banks like PNC have cut back on mortgage loans as Wall Street investors have stepped in, there is less risk for loan originators and brokers, because loans are quickly sold to other investors.
Financial industry lobbyists and their allies in the General Assembly have effectively resisted restrictive Pennsylvania legislation in recent years.
"From our perspective, the best way to reduce the foreclosure rate is through consumer education," said John Anthony, a Harrisburg-area loan broker and president of the Pennsylvania Association of Mortgage Brokers.
However, forcing brokers and lenders to do more to educate consumers before they borrow "would be difficult," Anthony said. "We're talking about volunteer education."
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