Ethel Cochran and daughter Shantivia Peterson face eviction from their Detroit home. Cochran paid $8,000 for it and now owes $116,000. (Ankur Dholakia / The Detroit News)
A lot of people made money on Ethel Cochran's home during the years.
There was the nice man who sat in her living room in 2004 and offered to lower her house payments. There was the company that sent her a letter the next year proposing a way to pay off her bills by refinancing. In 2006, she refinanced again when a gentleman on the phone claimed he could lower her payments and get her some cash. A few months later, a woman knocked on her door with yet another offer.
"I thought she was a nice lady," said Cochran, 68, of Detroit. "She said she could help me."
After buying her home for $8,000 in 1987, Cochran now owes 14 times that amount -- multiple refinancings larded with commissions have left her with a $116,000 mortgage she can't repay. Her latest lender took a $30,000 loss on the house. Her neighbors are losing money, too: Foreclosures drop the value of nearby homes.
Cochran took family photos off the walls this month, waiting to be evicted from her home of 20 years. "I don't know what happened," Cochran said.
A Detroit News investigation reveals that a cash-drunk mortgage industry with virtually no government oversight has turned Metro Detroit into a foreclosure factory, where foreclosure notices were served on 260 homes a day in August -- the equivalent of wiping out two subdivisions every 24 hours.
More than 70,000 homes in Metro Detroit -- equal to every residence in Southfield and Livonia -- have entered some phase of foreclosure in less than two years, according to The Detroit News analysis of foreclosure data. A pace that was already an all-time record in January 2006 has jumped six-fold since then, crippling the mortgage industry, driving down property values and leaving tens of thousands of families financially broken.
The News found that the economic cancer rooted in the foreclosure crisis has spread deeper and wider than previously known. More than 1 million homes in Metro Detroit -- 2 out of 3 households -- are worth less today because their value has been damaged by nearby foreclosures, according to a study by the Center for Responsible Lending, a consumer advocacy group focused on predatory lending.
The cost in Metro Detroit home values, lost assets and unrecovered property taxes so far: an estimated $1.6 billion, according to the Center for Responsible Lending -- enough to buy every home in the city of Grosse Pointe and Grosse Pointe Shores.
Once a relatively isolated event, foreclosures have become an economic plague, infecting the poorest and wealthiest neighborhoods and afflicting even residents who have never had a mortgage.
And it's going to get worse. The number of risky adjustable-rate loans scheduled to reset to higher interest rates is still going up, with the peak expected in March. That means foreclosures likely will rise for at least another year.
How Metro Detroit became one of the foreclosure capitals of America -- and the far-reaching impact of that title -- is a story of old vices and new schemes, where a system fueled by cash emptied the bank accounts of tens of thousands area residents.
"At the time, it was like the wild, wild West out there," said former mortgage loan officer Nicole Jackson. "We didn't realize what the fallout would be."
Mortgage crisis rocks banks
The savings and loan debacle of the 1980s is considered to be the costliest banking scandal in history, costing investors, banks and the government about $150 billion. Yet that financial crisis may be dwarfed by the final cost of the current mortgage meltdown. Bad mortgage debt may cost banks as much as $400 billion, according to Deutsche Bank; property values may sink another $223 billion. The human cost is even more alarming: As many as 2 million Americans may lose their homes before the housing meltdown ends.
But the nation's foreclosure crisis pales in comparison to Metro Detroit's housing implosion. The United States is struggling with an all-time high rate of one foreclosure filing for every 80 households in the country since January 2006, according to RealtyTrac data. In Metro Detroit, using the same data, 1 in 21 homes has been in some phase of foreclosure in that time. The city of Detroit's foreclosure rate is eight times the national average.
Not all notices lead to foreclosures. Some homeowners catch up on their payments while others negotiate more manageable terms. The majority find a way to refinance their overdue loans, often with loans that begin with affordable "teaser" rates, before escalating quickly. Still, the number of foreclosure filings offers a glimpse at the scope of the crisis in the region and the nation.
There are some Detroit neighborhoods where 1 in 7 homes received a foreclosure notice between January 2006 and September 2007. In the city as a whole, 1 in 10 homes has had a foreclosure notice in that time.
Relatively affluent suburban neighborhoods don't escape unscathed. In Lathrup Village, where the median household income is $107,000, 1 in 20 homeowners have been in some phase of foreclosure since 2006; in Lyon Township, 1 in 27 are in financial straits. In all, 112 of Metro Detroit's 130 communities -- where 92 percent of area residents live -- have foreclosure rates above the national average.
Michigan is first in the nation in delinquencies of subprime loans -- loans made to riskier borrowers in which the interest rate is at least 3 percent higher than for loans that can be offered to those with good credit. Delinquencies are the first step on the road to foreclosures. The state is first in FHA delinquencies, second in VA delinquencies and fourth in delinquencies on loans at better prime rates.
Five of the 10 worst ZIP codes in the nation for foreclosure are in the city of Detroit. A ZIP code in Cleveland is No. 1, followed by Detroit's 48228 and 48205. Chicago, Indianapolis and Atlanta also have ZIP codes in the top 10.
'Confluence of ugliness'
Michigan is an anomaly in the foreclosure crisis. Other states with the highest rates of foreclosure -- California, Florida and Nevada -- experienced housing booms in recent years with rampant speculation. Investors bought homes only to sell them six months later for a profit.
Michigan real estate never escalated -- or plummeted -- as much as in those states. It's not because its biggest city, Detroit, is one of the poorest big cities in America -- it's been poor for years and not had such high foreclosure rates.
Michigan's recession and nation-leading unemployment have played a role, but Michigan has had unemployment rates twice as high as it is today without approaching the current levels of foreclosure.
The sky-high foreclosure rate of Michigan -- and particularly Metro Detroit -- has as much to do with the mortgage industry as the auto industry.
"It was a confluence of ugliness," said John Kloster, an investment adviser based in Sylvan Lake. "It was our one-state recession, people trying to maintain their lifestyles, and money that was incredibly easy to borrow."
Kloster traces the origins of today's meltdown to 1984, when credit card interest stopped being tax-deductible.
After that, it made sense for homeowners to finance a better lifestyle with equity loans, on which the interest remained tax-deductible.
During the past few years as the state's economy drooped, "people lost their auto jobs. If you're struggling to keep your kid in college and keep your nice cars, the easiest way to do it was to suck money out of your house."
Metro residents pay more
Metro Detroiters paid higher mortgage interest rates and were more likely to get adjustable-rate mortgages for those loans than homeowners anywhere else in the nation. About 55 percent of mortgage loans in the region in 2006 were subprime, meaning the interest rates were at least 3 percentage points higher than the rates supposedly available to borrowers with good credit. That's double the national average, according to an analysis of national loan data by Association of Community Organizations for Reform Now (ACORN), a national consumer advocacy group. In Wayne County, 2 out of 3 home loans were subprime.
A lot of those homeowners probably qualified for better loans. A Fannie Mae study found that one-third of home buyers who received subprime loans qualified for prime loans, which could have saved them between $50,000 and $100,000 during the course of the loan and greatly decreased the odds of foreclosure. Unwitting home buyers were sold more costly loans by officers who often received bonuses for doing so.
The reasons why the region's residents received worse loans than borrowers elsewhere has as much to do with Wall Street as Cass Avenue.
Until the 1980s, almost all foreclosures were caused by personal tragedies of some kind -- death of a breadwinner, divorce, job loss or medical bills. While the majority of foreclosures are still the result of those factors, Cochran and thousands like her are losing their homes from causes that didn't exist 25 years ago.
Most mortgages today are sold in bundles of hundreds or thousands on the bond market. Investors -- and managers of the mutual funds many of us own in our 401(k) plans -- purchased the bonds because the interest they received on those mortgages was higher than their return on investment on other bonds. While housing values were rising and foreclosures low, those mortgage-backed bonds were big moneymakers.
To meet the market's demand for more mortgage-backed bonds, the mortgage industry had to sell more loans. To do that, lenders had to find new borrowers, and they often found them in urban areas traditionally shunned by banks. To make loans to low-income home buyers, many of whom had questionable credit, lenders loosened loan qualification standards.
"Wall Street got an appetite for high-interest loans, so lenders published ridiculously (lenient) loan guidelines," said Emil Izrailov, who started his career as a subprime mortgage officer and is now chief operations officer for Kaye Financial Corp. in Bloomfield Hills.
Along Detroit's poor streets such as Cass Avenue, lenders found homeowners who were both eager to borrow money, and who often lacked the sophistication to evaluate the risks of the loans.
Once numerous subprime mortgage shops opened in Detroit and marketed heavily on radio and billboards, the risky loans spread to the suburbs.
'Immoral and unethical'
Lenders worked on volume. "In the name of production, a lot of lenders took those products and inappropriately applied them to consumers," said Bill Matthews, senior vice president of the Conference of State Bank Supervisors, which advocates for state banking systems. "It was immoral and unethical."
It didn't matter if homeowners couldn't afford their adjustable-rate mortgages after their low, teaser rates ended; the profits from those who would refinance would offset the losses of those whose homes were foreclosed.
Some lenders were unwilling to work with homeowners who fell behind on payments, often because the company collecting payments was separate from the company that owned the loan.
When Karen Buegel lost a job and her income was cut in half, she called her mortgage company repeatedly, offering to make partial payments on her St. Clair Shores home until she could get back on her feet.
"I said, 'Let me pay something,' " Buegel said, "and they said they weren't interested unless I had the whole payment."
When her home was foreclosed earlier this year, Buegel owed about $135,000. The house sold at auction for $103,000.
If the lender was willing to lose money by selling the home for less than Buegel owed, why weren't they willing to accept less money from her, Buegel wonders.
The reason, Matthews explains, has nothing to do with the credit worthiness of the struggling homeowner, and everything to do with the "bundling" of loans to investors.
"When you pool a lot of mortgages together, it gives you diversity," Matthews said. "If you have a high enough yield on those mortgages, it doesn't matter if some of these loans go bad.
"What the hedge fund manager is missing, is it's destroying communities."
Many stuck with homes
Sharon Baldwin is a victim of foreclosure, and she's never missed a payment on her Huntington Woods house.
The 30-year-old accepted a great job in a Chicago public relations firm in early 2006, with an office that looked out over Lake Michigan. She loved the city and the job, but quit nine months later to return to Metro Detroit.
"I couldn't sell my house," said Baldwin, who couldn't afford a house payment in Michigan and rent in Chicago. "I know two other people like me who moved back from Chicago because they couldn't sell their homes. Whether it's foreclosures or economy, it's pulling the whole area down."
Millions of Metro residents have become collateral damage of the foreclosure explosion. From people such as Baldwin, who are virtually prisoners because no one will buy their homes, to Realtors whose income has been gutted, to homeowners afraid of the drug dealers setting up shop in vacant homes, foreclosures are hurting almost everyone. The housing meltdown has become the economic equivalent of secondhand smoke, causing damage to anyone nearby.
The tab for foreclosures -- in lost assets, unrecoverable loans, lost property value and uncollected property taxes -- on subprime loans made in 2005 and 2006 could reach $1 billion in Wayne County alone, according to an analysis of federal loan reporting data by the Center for Responsible Lending. In Oakland County, the cost is projected to be $363 million; in Macomb County, $289 million.
About 90 percent of those costs are borne by people and institutions other than the foreclosed homeowners. According to a study by the Association of Community Organizations for Reform Now (ACORN), lenders are the biggest losers, absorbing 38 percent of the cost. The flood of foreclosures has forced a number of mortgage lenders in the region to shut their doors in recent months, putting hundreds out of work.
Local governments are estimated to absorb 21 percent of the cost of foreclosures, mainly in losses in tax revenue.
Residents who don't even have mortgages are being financially damaged by the foreclosure crisis. Metro Detroit home prices have plummeted 18 percent since 2004; in Wayne County, values have dropped by more than a third in that same time. Rising interest rates, tighter lending standards and a nation-high unemployment level are likely the leading causes, but foreclosures are accelerating the decline. Industry experts estimate conservatively that every foreclosure drops the value of other homes within a block by 0.9 percent. That means an average home in Farmington Hills loses more than $2,000 in value when a nearby home is foreclosed.
Foreclosed homes are often sold at fire-sale prices by lenders eager to get rid of them. Those sale prices are then used to help calculate the value of neighboring homes.
Often, foreclosed homes fall into disrepair, further damaging the value of neighboring homes.
In Taylor, Ellen Cook's neighborhood is buzzing about a $250,000 home in foreclosure that has become an eyesore, in which the homeowner took the brick pavers from the driveway and a hot tub built into the deck.
"We're already having a problem in the neighborhood with prices going down," Cook said. "We've had people try to refinance and they can't get anything because their value has dropped."
And the pain won't stop anytime soon. About 90 percent of all recent foreclosures are on loans with adjustable rates -- loans in which payments start off cheap and then rise rapidly after a predetermined length of time, typically two or three years. According to Bank of America data, the number of adjustable-rate mortgages resetting to higher rates continues to rise, with a peak nationally expected in March. About $110 billion in loans will reset to higher rates in that one month alone -- five times the dollar amount of loans that reset in January.
There is a lag between ARMs resetting to higher rates and subsequent foreclosures, as homeowners fall behind on payments. Loans that reset in March won't reach foreclosure until the summer and fall of next year.
U.S. Treasury Secretary Henry Paulson warned last week that things will get worse next year. "The nature of the problem will be significantly bigger next year because 2006 (mortgages, which will reset to higher rates in 2008) had lower underwriting standards, no amortization, and no down payments," Paulson told the Wall Street Journal.
In short, 2008 may make 2007 look like the good old days.
The refinance loop
Ethel Cochran is losing her home of 20 years after getting caught in a vicious cycle of adjustable-rate refinances. It's a legal -- and for lenders, highly lucrative -- process called loan flipping. Her loans:
1987: Purchased home with an $8,000 mortgage
1997: Refinanced for $20,000
1998: Refinanced for $32,000
2001: Refinanced for $68,000
2004: Refinanced for $90,000
2005: Refinanced for $104,000
2006: Refinanced for $112,000
2007: Refinanced for $116,000
2007: Home is foreclosed
Sources: Ethel Cochran, ACORN