Frenzy of risky mortgages leaves path of destruction

By Peter Henderson, Tim McLaughlin, Andy Sullivan and Al Yoon

LOS ANGELES (Reuters) - On September 15, 2004, the clock was ticking on Lelon DeWitt's life and his subprime loan.

When the transmission repairman underwent open-heart surgery, he told his mortgage broker he didn't want a housing loan that was in the works.

"I didn't know if I was going to be dead or alive," DeWitt later recounted.

But the mortgage broker, Troy Musick of Wholesale Mortgage Co., was so eager to clinch the deal, he followed the couple into the hospital, said DeWitt's wife, Ruth DeWitt.

As a surgeon cracked Mr. DeWitt's chest open for a quadruple heart bypass, the broker approached her in the waiting room of Elkhart General Hospital in Elkhart, Indiana.

"It's now or never," she remembers him saying.

Afraid of losing out on the chance to buy a home, she left the hospital and signed the loan documents. Lelon DeWitt survived the surgery, but not the $143,400 loan from Irvine, California-based Argent Mortgage.

In the go-for-broke home loan industry of the past few years, the DeWitts quickly became another statistic. They lost their home in the midst of a crisis that has driven U.S. homeowners into foreclosure at a record rate.

Musick could not be reached for comment. Argent said it no longer does business with Musick, an independent mortgage broker.

In the latter stages of the housing boom, armies of independent mortgage brokers like Musick, and a new breed of subprime lenders like Argent, helped bring a whole new class of borrowers to the housing market, a boom that led to bust for thousands, including the DeWitts.

Lenders offered high-cost, risky mortgages -- called subprimes -- that put people with poor credit in their dream homes. Subprime lenders profited from returns far superior than from traditional fixed-rate, 30-year mortgages. Big blue-chip lenders also joined the fray, dropping their standards as they went.

SUBPRIME SATURATION

For nearly a decade, investors were rushing to real estate, creating enough capital to build a new class of homeowners -- loaded up with an incendiary mix of debt from car loans, credit cards and mortgages. Federal tax deductions and housing programs also fueled the boom.

Wall Street investment banks funded new subprime mortgage lenders, many based in California, by packaging their loans into mortgage-backed securities. That expanded the size and reach of the subprime lending, dovetailing with a long-held government policy of putting more Americans into their own homes.

The home-ownership rate surged to 69.3 percent in 2004, up 5 percentage points in 10 years. It was a stunning expansion, considering the rate rose only 2.2 percentage between 1965 and 1995, according to the U.S. Census Bureau.