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NORTHBOROUGH, Massachusetts (Reuters) - The red Victorian home on Maple Street has a wounded, abandoned look: trash litters the yard, the pool has frozen over, old clothes are strewn across dirty floors. Renovations are half-done.
On a window hangs a "for sale" sign posted by a broker who specializes in foreclosures, which have hit record levels in Massachusetts and surged nationwide after a housing slowdown that put millions of "subprime" borrowers -- those with poor credit records who pay higher interest -- at risk of default.
"This is normally the way we get them. Totally beaten up," said Marc Charney, president of CharneyRealEstate.com, as workers cleared debris and prepared the 2,180-sq-ft (203 sq meter), 10-room home in Northborough, Massachusetts for sale.
"There's a real pattern that you're seeing with people who are foreclosed. They over-leverage themselves by getting an interest only-loan or some sort of an adjustable rate mortgage. They take that money and plan an addition on the house.
"They start the addition but then realize they want to buy a car, or a sister needs money or something like that. So the work is half done. But you're out of money and lose your job, or you get divorced and can't make payments," he said.
"This is a dirtier side of the business because you're trafficking in despair and loss."
Banks and predatory lenders moved aggressively into the subprime mortgage market as a 2000-2005 U.S. housing price boom cut the risk of lending to people with damaged credit ratings. Rising prices meant borrowers could easily remortgage their properties to keep up with payments.
But since the housing market peaked, more of these borrowers have struggled to repay those loans, stoking fears the U.S. housing market will continue to contract and squeeze the broader economy.
Concern over the foundering subprime mortgage industry has roiled Wall Street this week, sending the stock price of California subprime lender New Century Financial Corp.NEW.N down 70 percent on Monday on fears it could go bankrupt.
The Center for Responsible Lending, a consumer advocacy group, forecasts one in five mortgages taken out by high-risk creditors in 2005 and 2006 will end in foreclosure, with homeowners losing $164 billion, mostly in home equity.
In Massachusetts, where housing prices notched double-digit growth between 1995 and 2004 in a red-hot market, foreclosure filings surged 70 percent to 19,487 homeowners last year, as single-family home prices fell for the time since 1993.
The pace continued in January when the number of homeowners threatened with foreclosure more than doubled in a year to a record -- the most for any state in the U.S. Northeast and exceeding the larger New York property market.
"Our latest data indicates that 2007 may be even worse," said Jeremy Shapiro, president of ForeclosuresMass which compiled the Massachusetts data, adding that it may take months for a house to be seized by lenders after an initial filing.
The Federal Reserve Bank of Boston blames subprime loans, saying they accounted for more than two-thirds of the state's foreclosure filings in the third quarter of 2006 even though they made up just 12 percent of all mortgages.
Nationwide, about 14 percent of all mortgages are subprime, up from 2.4 percent in 1998, Mortgage Bankers Association data show. The big fear is that the U.S. housing market will continue to contract, leading to pressure on U.S. households and the U.S. financial system from defaulting mortgages.
Charney said selling foreclosed homes can be profitable but the homes often need repairs and require a specific type of buyer who can stomach the work. "These are not usually for first-time home buyers," he said.
Profit margins for brokers are often thin at just one or two percentage points -- about a point below those of conventional homes -- but growing volumes make them lucrative.
"As the sellers finally get their head around the idea that they may be taking losses, they are listening more to the brokers," he said. "If I say to them this house is worth $195,000 and you should list it for $205,000 and expect to get $195,000, there is a good chance that they'll do that and I'll make money in this really bad market."