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Crisis rooted in towns like ours

Ten years ago, James and Carolyn Robinson purchased a modest Huntersville home at an interest rate far higher than what their credit score and income should have earned.

The Robinsons, who are black, were among tens of thousands of minority homebuyers across the country charged higher rates than whites with similar financial circumstances, a 2005 Observer investigation found. Those high-interest loans more often ended in default – including the Robinsons' – resulting in ruined credit, damaged neighborhoods and, ultimately, the first warnings of a U.S. foreclosure and credit catastrophe.

The developments rocking Wall Street this week can be traced back to neighborhoods across the country, to boomtowns like Charlotte, where years of questionable loans – often to people with income and credit problems – have rippled into a housing and financial emergency.

Since 2005, the Observer has chronicled the genesis of the crisis, reporting how lenders and ill-equipped buyers took advantage of a reckless lending environment, how predatory builders and real estate companies broke laws while selling the dream of home ownership, and how a lack of regulatory supervision allowed it all to happen.

“The mortgage industry has said they have increased home ownership,” HUD's inspector general, Kenneth Donohue, told a U.S. House committee in 2007. “However, at what cost to the American people?”

In late 2005, few knew the depth of troubles the credit industry would be facing. But in August of that year, an Observer analysis of 2.2 million loan applications nationwide revealed that blacks and Hispanics were more likely than whites to get high-interest loans, often subprime, even when their incomes should have qualified them for market rates.

Those high-interest loans led more often to defaults, industry statistics showed, and those foreclosures decreased the value of surrounding properties by thousands of dollars – leading to more loan defaults when neighbors tried to sell their homes.

Four months later, in January 2006, the Observer reported on the breadth of the foreclosure crisis in Mecklenburg, where home loan failures had quadrupled in seven years. Not only were high-interest loans failing, but also loans homebuyers obtained with help from the Federal Housing Authority.

The root of the problem: In the previous decade, both the Clinton and Bush administrations made increased home ownership a policy goal, and the Department of Housing and Urban Development loosened eligibility requirements for FHA loans. Homeowners were allowed to effectively forgo making a down payment, and they could borrow more money relative to their incomes.

The FHA also guaranteed repayment of their mortgage loans, allowing lenders to take more chances on loans, because the government took on the risk of default. Loosened regulations also resulted in the spawning of high-interest lenders willing to take on riskier borrowers.

Home ownership increased, but so did the number of people who found themselves unable to make monthly payments. The Observer found that high-interest loans, FHA loans and easy-credit refinancing loans accounted for three-fourths of Mecklenburg foreclosures.

More than 80 percent of all county foreclosures happened with “starter homes” priced at $150,000 or less – and those homes were clustered in subdivisions ringing the county. Public officials were surprised at the numbers; no one had tallied foreclosures in Charlotte or in most American cities.

By 2007, the country was awakening to the foreclosure crisis, and Mecklenburg was surging in home defaults, with at least 35 subdivisions afflicted by a 20 percent or greater foreclosure rate.

In March, the Observer investigated the issue from the ground level, examining how one national homebuilder, Beazer Homes USA, arranged easy credit for mortgage loans that buyers clearly couldn't afford. Beazer qualified buyers by paying part of their monthly bill for the first two years of the loan, a permitted but risky practice called a “buydown.” Beazer also may have violated federal law by arranging loans based on misstated debts or income. This year, Beazer closed its national mortgage unit after admitting employees violated federal housing regulations.

Beazer built about 2,900 homes in Mecklenburg between 1997 and 2006. About 400 foreclosed, a 13 percent rate, the highest among the county's most prolific builders.

Homebuyers also faced exploitation from real estate companies, including Realty Place, a Charlotte area company that accepted millions of dollars in payments from builders for steering buyers with spotty credit into new developments, the Observer found. Many of those neighborhoods are now plagued by foreclosures.

Regulators told the Observer that at least some of the mortgage misconduct could be blamed on inattention from local, state and federal officials. Without anyone tracking foreclosures closely, officials missed the clusters of defaults that sometimes indicate misconduct by brokers, builders and appraisers.

The FHA and lenders have since tightened standards on their loans, but the adjustments came too late. Hundreds of mortgage firms – including Countrywide and IndyMac – have failed or been taken over. Banks have scrambled to cover losses from non-performing lenders they purchased. Investors have watched loan packages, which were sold as securities, lose their value because of the massive defaults.

Said former FHA director William Apgar, in a 2006 Observer interview: “Foreclosures beget foreclosures. Every time a loan goes into default, there is collateral damage.”

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