WASHINGTON — Vicki Miller bought her childhood home in Altoona, Pa., from her mother’s estate for $32,000, using a nice, traditional mortgage from the local savings and loan.
Seven years later, her debt has more than doubled, her once-significant equity has shrunk to zero and she’s behind on her payments. The lender has begun to threaten foreclosure.
“I grew up here. My son grew up here. And I had hoped my grandchildren would grow up here,” Miller says woefully.
Miller says she was persuaded to refinance her mortgage twice into subprime loans she didn’t really understand, along with taking out a second mortgage. As such, she reflects what experts say is the true face of the subprime mortgage debacle.
Discussion of the problem often focuses on first-time home buyers who stretched to buy homes they couldn’t afford. But experts who’ve crunched the numbers say 90 percent of people who took out subprime loans from 1998 to 2006 were already homeowners.
Many, like Miller, had conventional, prime loans that were well within their means. What often got them into trouble was that they refinanced their mortgages without really understanding the terms and without realizing that the sales pitches and loan documents were sometimes deliberately opaque to snare the unwary.
The result is thousands of cases like Miller’s, in which the damaging outcome is clear but in which it’s difficult to figure out how it happened or who’s to blame.
“I should have just stayed with the loan I had. I realize that now,” says Miller, who earns a modest income as an office worker.
Lawmakers debating a mortgage rescue bill have spent a great deal of time trying to make sure they don’t reward careless or greedy mortgage holders. But lawyers working with troubled borrowers say few of them were trying to finance outrageous lifestyles.
Most were like Miller, they say, existing homeowners who found themselves in need of money and responded to aggressive advertising for refinancings.
“There’s this myth out there that this was a bunch of people overreaching,” says Patrick Cicero, a lawyer with MidPenn Legal Services in Harrisburg, Pa., who represents low-income homeowners facing foreclosure.
“These were elderly people trying to fix up their homes. These were people lured in by promises of lower monthly payments and the consolidation of their debts who didn’t understand they were putting their homes at risk.”
When lenders ramped up subprime lending in the mid-1990s, it was touted as a way to expand homeownership among people with low incomes or shaky credit histories. And many have pointed to the growth of homeownership — from 64 percent of households in 1994 to 69 percent of households by 2005 — as evidence that subprime lending had genuine benefits.
But Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, notes that most of that expansion in homeownership occurred in the late 1990s, before subprime lending exploded.
Elizabeth Renuart, a housing attorney with the National Consumers Law Center in Boston, says that many subprime lenders and brokers targeted neighborhoods of people like Miller.
They were promised cash, based on the equity in their homes. And the solicitations were rarely clear about the fees and interest rates, advocates for homeowners say.
Moreover, subprime loans always charged higher interest rates.
That meant bigger commissions for the loan agents and brokers who sold the loans, and provided higher returns to investors who bought securities that were composed of bundled subprime loans.
“It was push marketing,” Renuart says. “As the engine revved up from Wall Street to invest in these things, the pressure was on the brokers to make these loans.”
