Sold A Nightmare

Starter homes, sad endings: Part 2 of 'Sold a nightmare'

A wave of loan defaults in starter-home developments is pushing the foreclosure count in Mecklenburg County to record heights, an Observer analysis shows.

Lenders foreclosed last year on more than 900 Mecklenburg starter homes, up more than 150 percent since 2003. Foreclosures of older or more expensive homes rose by only 18 percent during the same period.

The failures are Charlotte's piece of a national problem.

Millions of lower-income families used easy-money loans to buy first homes over the past decade. Many put nothing down, paid no closing costs and received low introductory payments.

When the payments start climbing, many families can't keep up. Experts predict more than 1.5 million families who bought homes in recent years will lose those homes during the current wave.

Foreclosures are personal disasters, but it is increasingly clear that clusters of foreclosures damage entire neighborhoods. Home prices drop. Remaining owners can't afford to sell their homes for less than they paid. Additional foreclosures result. Renters move in. Crime can rise.

In Mecklenburg, the problems are concentrated in neighborhoods of vinyl-sided houses built in the past decade and priced below $150,000.

The Observer identified at least 35 starter-home developments in the county where 20 percent or more of the homes have foreclosed. That is more than six times the national foreclosure rate.

The troubled neighborhoods are concentrated west, north and east of downtown Charlotte, a crescent of deteriorating development that is putting pressure on surrounding communities.

"This is an issue we're going to have to address," says Charlotte City Council member Michael Barnes, whose district in northeast Charlotte contains more than a dozen high-foreclosure neighborhoods.

"Builders put them in, sell them and move on to another subdivision," Barnes says. "But we're all going to have to deal with the long-term repercussions ... including increased costs for public safety."

Two kinds of loans

More than 8,700 homes have foreclosed in Mecklenburg County since 2003. The county's foreclosure rate is the highest in the state.

Two kinds of home purchase loans are associated with most of the problems, according to an Observer analysis of foreclosures in 2003 and 2004. Subprime loans accounted for at least 24 percent of Mecklenburg foreclosures. Government-insured loans accounted for almost 30 percent.

The same companies often arrange both kinds of loans. They work with homebuyers who don't get loans from conventional sources such as banks. Some of those people have bad credit, others have little savings or income, some simply don't know they could get a better deal somewhere else.

The subprime industry grew up in the mid-1990s. The companies charge high interest rates, but impose few restrictions on eligibility. Most of the loans are sold through independent mortgage brokers.

Investors provided the money for the subprime industry. They profited handsomely from borrowers' payments. But as defaults rise, concern about those investments has driven down the stock market. Five of the largest subprime lenders have fired almost 6,000 people in the past year, including 250 employees of Wells Fargo & Co. in Fort Mill, S.C.

New Century Financial, the second-largest subprime lender, is on the verge of filing for bankruptcy.

Government-insured loans are also funded by investors, but the federal government promises to pay if the borrower doesn't. This encourages lending to lower-income families, but it leaves companies with little reason to exercise caution. In many cases, lenders made larger loans than borrowers could afford.

In Southern Chase, the Cabarrus County neighborhood profiled by the Observer on Sunday, the Federal Housing Administration already has spent $5 million to compensate lenders, some of it for loans that didn't meet government requirements in the first place.

Experts say the number of foreclosures in Mecklenburg and nationwide is likely to increase again this year as monthly mortgage payments continue to rise.

Year FCs StFCs Share
2003 1,692 357 21 %
2004 2,320 674 29 %
2005 2,233 670 30 %
2006 2,487 911 37 %
TOTAL 8,732 2,612 30 %

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