Subprime bust forces families from homes
Here's the living room, still covered in the worn blue shag Angela Sneary always intended to replace with the sheen of hardwood. And downstairs, through a curtain of plastic beads, is the basement where husband Tim was going to knock out a wall and put in a foosball table.
Step this way and the Snearys point out the places where they never could find the cash to hang a ceiling fan, install a hot tub, replace the siding ... a long list of abandoned ambitions that seem almost too big to squeeze into the modest four-bedroom tri-level.
Owning a home is all about finding humor in unfinished projects. But in the house set back from a bend at 11030 Eudora Circle, the Snearys never had the luxury.
They ran out of money first. Then, they ran out of time. Soon, they'll almost certainly be out of a home.
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Buying a home is the American dream and a record number of Americans — nearly 70 percent — are living it.
Many families, though, likely never would have become owners if not for the tremendous growth over the past decade of a new kind of mortgage business called subprime lending. It long seemed like a winning proposition for all parties. Now the costs are becoming apparent — and they are very unsettling.
Subprime lenders peddle new kinds of mortgages, often requiring no money down and made at "teaser" interest rates that soon rise. They target marginal borrowers with weak credit or questionable incomes who previously might not have gotten a loan at all.
By last year, subprime loans made up 20 percent of the market for new mortgages.
But as the housing market cools, thousands of subprime borrowers are struggling to keep their homes. A number of subprime lenders, saddled by failed loans and a shortage of cash, have folded or staggered. In some particularly hard-hit neighborhoods in Denver's suburbs — one of a few metropolitan areas where the problem is especially grave — home after home sits dark.
Clearly, this isn't how the American dream is supposed to play out, but who's to blame?
The experience of families like the Snearys show how the squeeze created by questionable lending can quickly be compounded by family economic crises, a lack of planning and knowledge, and the rapid shifts in a real estate market that once seemed unstoppable.
"You were set up to fail," one real estate agent told them.
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It's a sobering thought for anybody who shares the American dream. After all, it hits so close to home.
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Tim first met Angela when he was just 5. She was hours old.
Their fathers were best friends, "two old hippies who partied together." On an afternoon 33 years ago, they celebrated Angela's arrival. Tim stared at the tiny infant a nurse held up to the maternity ward window and waved.
Sixteen years later, Angela's dad died. Tim, just out of the Navy, went to pay his respects. He offered his arms to Angela — and never let go.
In the wedding photos, Tim's rock-star hair reaches the shoulders of his white tuxedo. Angela's bridal gown does little to hide her eighth month of pregnancy.
The new family grew fast — a year after Amanda was born, Timmy Jr. followed and three years later came Steven. Tim found work doing landscaping in Denver's mushrooming subdivisions. Angela got a job working for an insurance company. Eventually, they combined to make around $55,000 a year.
They moved from rental to rental, aspiring to buy. By 2004, their rental town house was getting tight. A neighbor complained they were noisy.
The couple set out to look at homes in Thornton, a fast-expanding, mostly working-class suburb 20 minutes outside Denver.
They loved the second house the agent showed them, tucked in a 1970s subdivision with streets curled around each other like a ball of yarn. It was painted glowing pink with a big shade tree out front. The kitchen drawer-pulls were shaped like tiny forks and spoons. It had spacious bedrooms for all three kids, plenty of space for three dogs and six cats.
Tim "walked in here and said this is perfect," Angela recalls.
It cost $204,000. "We thought we were getting a deal," Tim says.
The agent said he'd find them a mortgage, no money down. The Snearys say they never thought to shop around.
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More than two years and 100-plus homes later, agent Kent Widmar says he has no memory of the couple or the deal. But he knows his customers — and subprime loans are the only loans most can get.
"I kind of work the bottom of the market, the tough deals, the people that can't get credit anywhere," Widmar says. "You're dealing with people where nobody else (other lenders) is even going to talk to them ... It's not like you have a whole lot of choices."
The Snearys say they expected to borrow at a fixed rate of 6.5 percent. That would put monthly payments at about $1,290, a little more than rent.
But at the closing in August, all the numbers were higher. The Snearys were offered two loans, both from a Texas subprime lender, Sebring Capital Partners. The first, for 90 percent of the purchase price, was at 8.31 percent, set to adjust after two years. The second, for the remainder, was at 13.69 percent.
The house would cost $1,623.80 a month to start — and it was almost certain to rise.
Looking back, Tim wishes they'd asked more questions or considered walking out. But everything was in boxes, and they'd given notice. So they eyed each other nervously, and agreed to work more hours. Then, they signed the papers.
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The home loan business is very different from what it used to be.
"When we were children, the lender was a savings and loan — just like in 'It's a Wonderful Life'," says Oliver Frascona, a Boulder, Colo. attorney whose firm represents many lenders in foreclosure proceedings, including the Snearys'. "The lender was loaning their own money ... so they were very careful with how they lent it."
Savings and loans had their own deeply serious flaws, and their failings opened the business to competitors.
Today, many buyers find loans through a mortgage broker. Many of those loans — certainly subprime loans — come not from local banks but from loan originators. These companies hold the loans briefly before reselling them, earning a profit and passing along the risk.
The mortgages are usually bought by a bank or Wall Street firm. Sometimes a loan servicing company, which pockets a fee for administering each mortgage, acts as a go-between. Then the loans are bundled and resold as securities to investors.
The new system works well in many ways, but the incentives driving the players are very different. The mortgage broker and loan originator, rather than being restrained by risk, pursue the profit that is the reward for generating new business. An enthusiastic Wall Street provides cash for yet more loans.
But the willingness to downplay the risk of subprime loans turns a business of caution into a hedged bet. Often, buyers qualify for these loans only because they can afford payments at the introductory rate, without considering how they'll make good once the rate goes up.
While home prices kept rising, it hardly seemed a gamble. Lenders and investors embraced the high returns generated by such loans. For consumers with shaky credit, it was easier to buy a home, easy to refinance and easy to sell for a gain.
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Then the market turned — and for many homeowners, the escape hatch slammed shut.
There will always be people who fall behind on loans.
But "house prices are no longer the lifesaver they were for people in good times," says Ellen Schloemer of the Center for Responsible Lending, which recently projected a sharp rise in subprime foreclosures in the next few years.
Now, owners in trouble are living in homes that may be worth substantially less than they owe. They can't sell or refinance. They are ensnared in loans whose costs keep rising.
It is a vortex that's difficult to escape. Schloemer calls it "the perfect storm."
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On their first night as homeowners, the Snearys celebrated at one of the kids' favorite restaurants, Old Chicago, with a deep-dish pepperoni pizza. The next morning, Tim borrowed a trailer from work and moved them in. They set to work making the place their own, repainting the exterior themselves in a stunning night-sky shade called Suddenly Sapphire.
They stopped when they ran out of paint. Two years later, patches of pink still show through the eastern wall.
For a few months, anyway, they kept pace with the costs. But as 2004 ended, Tim's employer — who had already laid him off and called him back — sent him home for good.
With little saved, the Snearys immediately fell behind, missing two payments.
By now, their loan had been sold. The new loan servicer, Homecomings Financial, told them they'd need to catch up and set up a payment plan. The Snearys' monthly bill jumped to $1,920.
After three months, Tim found a new job for two-thirds of his previous pay. A tax refund helped. But the larger payments "had us strapped so tight it wasn't even funny," he says.
So Angela took on more hours.
In July 2005, she pointed her Saturn into Denver's morning rush. Trying to merge into traffic on I-25, the car was slammed from behind. It spun across traffic and smashed into the concrete divider.
Doctors said Angela would be OK. But disabling headaches kept her home for three weeks, and made work for another three all but impossible. The couple fell further behind.
The lender set up a new payment plan. Monthly costs jumped to $2,100. Angela began draining her small 401(k).
If the Snearys could make it through 2006, maybe they could refinance and dig out.
Now, though, there was another problem.
They still owed nearly all of their loan. But their home was worth much less in a real estate market slowed by economic uncertainty and bloated by new construction. The couple, convinced they'd overpaid, couldn't refinance or sell.
Instead, they neared the two-year mark, when their interest rate would jump.
The lender "said you're going to have to pay ... or we'll have to go to foreclosure," Tim says. "Well, I guess I'm going to have to go foreclosure because I've given everything I have to give and you can't squeeze blood from a turnip."
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The foreclosure notice came last October. The Snearys have not made a payment since.
In theory, if they paid up, they could keep the house. But there is no money or incentive.
A few weeks ago, Homecomings sent a letter. Stay and their interest rate will leap again to 12.8 percent. Payments that were impossible to meet temporarily will become permanent.
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Late last year, a form letter arrived in the Snearys' box from their original lender, Sebring Capital, inviting them to refinance.
"I thought it was crazy," Tim says. They threw the letter in the trash.
It's just as well. Weeks later, Sebring folded, a stark example of how quickly subprime lending has soured.
Sebring, a mid-sized lender, hardly wasted away. Near the end, it was initiating nearly $200 million in new loans a month, senior vice president Michael Waldron says.
But the company didn't have the cash to keep up, particularly as the market turned, and Sebring went searching for a buyer.
When subprime lenders sell mortgages, they sign contracts promising that loans will meet certain standards and performance measures. Otherwise, the lenders are obligated to take the loans back.
Sebring found a buyer — just as Wall Street began taking notice of the spike in foreclosures and the resulting squeeze on lenders. The deal fell through and the next morning executives at what had been one of Dallas' fastest growing companies gathered their 325 employees to announce they were shutting down.
That would be no big deal if it were only the tale of a single company. But in recent months, more than two dozen subprime lenders have stumbled or failed.
The question now is just how many more bad loans like the Snearys' are still out there — and who will be left holding the bag.
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Officially, it's an auction.
But there is no machine-gun sales chatter at Adams County's weekly foreclosure sale, no gavel-banging. Bargains are doubtful, so no bidders show up. It is mostly a formality, finished minutes after it begins.
That's the scene this Wednesday morning, when the Sneary home goes up for sale. With many homes worth less than borrowers owe, the only bids are the ones submitted in advance by the banks holding the soured loans.
The lack of bids gives Tim and Angela 75 more days to move out. They hope that will be enough to find a buyer who'll satisfy their lender, and keep foreclosure from staining their record.
But even if that doesn't happen, the couple has reached an unexpected truce with failure. After two years of fighting to hold on to a house, there's soothing relief in losing. Finally, there's a chance to rest, to crawl out from under the pressure.
They can stop shouting now, the Snearys say. They can give the time they'd spent working to the kids. They'll find new jobs, a place to rent, and try to save.
The Snearys have a long-term plan, too. In a few years, they hope to buy again.
But the next time will be different, Tim and Angela say. They'll stay within their means. They'll borrow more intelligently. And they already know just where to find a deal.
They'll make an offer to another family desperate to escape foreclosure.
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