Foreclosures Hit a Snag for Lenders
By GRETCHEN MORGENSON
A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools.
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.
The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.
But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.
Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.
The ruling was issued Oct. 31 by Judge Boyko, and relates to 14 foreclosure cases brought by Deutsche Bank National Trust Company. The bank is trustee for securitization pools, issued as recently as June 2006, claiming to hold mortgages underlying the foreclosed properties.
On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.
Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”
A spokesman for Deutsche Bank declined to comment on the ruling. But the inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.
“This is the miracle of not having securities mapped to the underlying loans,” said Josh Rosner, a specialist in mortgage securities at Graham-Fisher, an independent research firm in New York. “There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools.”
The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. A trustee bank oversees the pool’s operations, ensuring that payments made by borrowers go to the appropriate investors.
Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. Such proof gives a creditor standing to foreclose against a borrower and is required by law.
“The big issue in all these cases, whether we are dealing with a bankruptcy court, a state court or a federal court, is who really owns the mortgage note, and that is allegedly what they securitized,” said O. Max Gardner III, a lawyer who represents borrowers in foreclosure in Shelby, N.C. “A collateral question is, has that mortgage note really been transferred and assigned to the securitization trust? If not, then they really don’t have standing. It’s Law School 101.”
When a loan goes into a securitization, the mortgage note is not sent to the trust. Instead it shows up as a data transfer with the physical note being kept at a separate document repository company. Such practices keep the process fast and cheap.
Because most foreclosures proceed without challenges from borrowers, few judges have forced trustees like Deutsche Bank and Bank of New York to prove ownership by producing a mortgage note in each case.
Borrower advocates cheered Judge Boyko’s ruling.
The plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.” The cases could be filed again in state court, however.
April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, who has been practicing foreclosure law since the late 1980s, said she rarely sees proof of ownership in cases involving securitization trusts. Her group has 30 to 50 such cases and not one of the lenders’ representatives has produced proof of ownership predating the foreclosure action.
“We see a trend toward judges having enough of this trampling of the rules and procedure and care and reverence with which lawyers and litigants and participants in the judicial process should comply,” Ms. Charney said. “Hopefully this will convince everybody that the time to work out these home loans is now.”
Sunday, November 18, 2007
Thursday, November 8, 2007
Paul vs. Bernanke on Value of the Dollar
Paul vs. Bernanke on Value of the Dollar
Candidate Rep. Ron Paul Faces Off With Fed Chairman
ESSAY By Z. BYRON WOLF
Nov. 8, 2007 —
When you are Ron Paul, your public enemy No. 1 is the chairman of the Federal Reserve.
Because when you are Ron Paul, although you are technically a Republican, you are really a libertarian, and your strict adherence to the gospel of the Constitution leads you to question why the Federal Reserve -- the consortium of 12 reserve banks that acts as the U.S. central bank -- even exists.
It doesn't say anything about any central bank in the Constitution. Not only that, the primary responsibility of the Federal Reserve -- to control the money flow and availability of currency on the open market -- is something that you, Ron Paul, find incorrigible. The government, you believe, creates inflation when it prints money and moves it willy-nilly into the market to control the very inflation you think it's causing by moving that money around in the first place. Counterpoint: The gold standard was too inflexible, and the average citizen suffers when the government can't give the markets more fuel in the form of money. (And for your information, here's a Fed-produced interactive feature on the Fed.)
But you, as Ron Paul, have your druthers. You'd get right on back to the gold standard, where each dollar represents a set amount of gold. This whole artificial currency is maddening to you (and it's a lot of the reason you're running for president, although you get more press for being the only Republican candidate openly in opposition to the Iraq War). In fact, if you became president, one of the many pieces of the federal government you'd work to abolish, along with the Internal Revenue Service and the Department of Education, is the Fed.
So, when you're not out on the stump running for president but back at your day job in Washington, D.C., a job you plan to keep should you fail in your quest for the White House, it's a good thing for you, as congressman Ron Paul, to sit on the Joint Economic Committee, which from time to time hears testimony from Ben Bernanke, chairman of your hated Federal Reserve.
During today's testimony questions from most senators and representatives on the committee had to do with the housing crisis and whether a recession was in the offing.
But when Paul squared off with Bernanke, things were a bit different. More like Bernanke was dealing with a combative grad student during office hours at Princeton.
After a diatribe about how the government and the Fed are trying to patch up market woes without addressing core problems, Paul pointed out, "Nobody says, 'Where does it come from?' And what is the advice that you generally get, and that is inflate the currency. They don't say inflate the currency, they don't say debase the currency, they don't say devalue the currency, they don't say cheat the people. They say lower the interest rates.'"
But when people crow to the Fed to lower interest rates and make larger sums of money more accessible, argued Paul, they're not really asking for the interest rates to be lowered; they're asking for the government to print more money.
"But they never ask you, and I don't hear you say too often, 'The only way I can lower interest rates is I have to create more money. I have to lower the discount rate, I have to make it generous, I have to increase reserves, I have to lower the interest rates and fix the interest rates.'"
Later, Paul called it "a fallacy" that made the dollar "weaker" and "invites inflation."
"It is that not only have we had a subprime market in housing; the whole economic system is sub prime," Paul railed. "We artificially lower interest rates. And it wasn't under your tenure in office; it's been going on for 10 years and longer and now we're bearing the fruits of that policy."
Paul argued the government shouldn't be concerning itself with deceptive lending practices but with its deceptive monetary policy.
"The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. Yet there's so-called capital. There's money available. But it comes from what you have to do and the pressures put on you.
Several minutes into his questioning, Paul got to a question for Bernanke, though it was more of an entree to a larger debate: "How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money, with more inflation?"
Bernanke answered saying, in the parlance of an average economist, he's just doing what Congress created the Fed to do.
"What we're trying to do is follow the mandate that Congress gave us," Bernanke said. "And the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth. And as I talked about today, and I think you would agree that we do see risk to inflation and we are taking those into account and we want to make sure that prices remain as stable as possible in the United States."
Paul countered that by putting more money on the market, Bernanke and the Federal Reserve are devaluing the dollar and robbing from Americans.
"There's a dollar crisis out there and people's money is being stolen; people who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed at 10 percent. But how can you pursue this policy without addressing the subject that somebody's losing their wealth because of a weaker dollar? And it's going to lead to higher interest rates and a weaker economy."
Bernanke argued that since Americans use dollars to buy their goods here in America, a devalued dollar will make imported goods more expensive.
Paul shot back, rounding out his five minutes of questions, "Yes, but not if you're retired and elderly and you have CDs and their cost of living is going up no matter what your CPI says. Their cost of living is going up and they are hurting."
It was an interesting exercise in theory, but Paul, even if he were to be elected president, probably would not have the votes in Congress to revamp the financial system, much less abolish the Fed.
A reason perhaps why none of this made wire or newspaper accounts of the hearing, all of which focused on Bernanke's contention that despite an intensifying slump in the housing market, slower than expected growth and higher inflation, he does not believe the country is headed for a recession and tried to divine where Bernanke's testimony signaled another interest rate cut.
Copyright © 2007 ABC News Internet Ventures
Candidate Rep. Ron Paul Faces Off With Fed Chairman
ESSAY By Z. BYRON WOLF
Nov. 8, 2007 —
When you are Ron Paul, your public enemy No. 1 is the chairman of the Federal Reserve.
Because when you are Ron Paul, although you are technically a Republican, you are really a libertarian, and your strict adherence to the gospel of the Constitution leads you to question why the Federal Reserve -- the consortium of 12 reserve banks that acts as the U.S. central bank -- even exists.
It doesn't say anything about any central bank in the Constitution. Not only that, the primary responsibility of the Federal Reserve -- to control the money flow and availability of currency on the open market -- is something that you, Ron Paul, find incorrigible. The government, you believe, creates inflation when it prints money and moves it willy-nilly into the market to control the very inflation you think it's causing by moving that money around in the first place. Counterpoint: The gold standard was too inflexible, and the average citizen suffers when the government can't give the markets more fuel in the form of money. (And for your information, here's a Fed-produced interactive feature on the Fed.)
But you, as Ron Paul, have your druthers. You'd get right on back to the gold standard, where each dollar represents a set amount of gold. This whole artificial currency is maddening to you (and it's a lot of the reason you're running for president, although you get more press for being the only Republican candidate openly in opposition to the Iraq War). In fact, if you became president, one of the many pieces of the federal government you'd work to abolish, along with the Internal Revenue Service and the Department of Education, is the Fed.
So, when you're not out on the stump running for president but back at your day job in Washington, D.C., a job you plan to keep should you fail in your quest for the White House, it's a good thing for you, as congressman Ron Paul, to sit on the Joint Economic Committee, which from time to time hears testimony from Ben Bernanke, chairman of your hated Federal Reserve.
During today's testimony questions from most senators and representatives on the committee had to do with the housing crisis and whether a recession was in the offing.
But when Paul squared off with Bernanke, things were a bit different. More like Bernanke was dealing with a combative grad student during office hours at Princeton.
After a diatribe about how the government and the Fed are trying to patch up market woes without addressing core problems, Paul pointed out, "Nobody says, 'Where does it come from?' And what is the advice that you generally get, and that is inflate the currency. They don't say inflate the currency, they don't say debase the currency, they don't say devalue the currency, they don't say cheat the people. They say lower the interest rates.'"
But when people crow to the Fed to lower interest rates and make larger sums of money more accessible, argued Paul, they're not really asking for the interest rates to be lowered; they're asking for the government to print more money.
"But they never ask you, and I don't hear you say too often, 'The only way I can lower interest rates is I have to create more money. I have to lower the discount rate, I have to make it generous, I have to increase reserves, I have to lower the interest rates and fix the interest rates.'"
Later, Paul called it "a fallacy" that made the dollar "weaker" and "invites inflation."
"It is that not only have we had a subprime market in housing; the whole economic system is sub prime," Paul railed. "We artificially lower interest rates. And it wasn't under your tenure in office; it's been going on for 10 years and longer and now we're bearing the fruits of that policy."
Paul argued the government shouldn't be concerning itself with deceptive lending practices but with its deceptive monetary policy.
"The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. Yet there's so-called capital. There's money available. But it comes from what you have to do and the pressures put on you.
Several minutes into his questioning, Paul got to a question for Bernanke, though it was more of an entree to a larger debate: "How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money, with more inflation?"
Bernanke answered saying, in the parlance of an average economist, he's just doing what Congress created the Fed to do.
"What we're trying to do is follow the mandate that Congress gave us," Bernanke said. "And the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth. And as I talked about today, and I think you would agree that we do see risk to inflation and we are taking those into account and we want to make sure that prices remain as stable as possible in the United States."
Paul countered that by putting more money on the market, Bernanke and the Federal Reserve are devaluing the dollar and robbing from Americans.
"There's a dollar crisis out there and people's money is being stolen; people who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed at 10 percent. But how can you pursue this policy without addressing the subject that somebody's losing their wealth because of a weaker dollar? And it's going to lead to higher interest rates and a weaker economy."
Bernanke argued that since Americans use dollars to buy their goods here in America, a devalued dollar will make imported goods more expensive.
Paul shot back, rounding out his five minutes of questions, "Yes, but not if you're retired and elderly and you have CDs and their cost of living is going up no matter what your CPI says. Their cost of living is going up and they are hurting."
It was an interesting exercise in theory, but Paul, even if he were to be elected president, probably would not have the votes in Congress to revamp the financial system, much less abolish the Fed.
A reason perhaps why none of this made wire or newspaper accounts of the hearing, all of which focused on Bernanke's contention that despite an intensifying slump in the housing market, slower than expected growth and higher inflation, he does not believe the country is headed for a recession and tried to divine where Bernanke's testimony signaled another interest rate cut.
Copyright © 2007 ABC News Internet Ventures
Tuesday, November 6, 2007
Foreclosure wave sweeps America
Foreclosure wave sweeps America
By Steve Schifferes BBC economics reporter, Cleveland, Ohio
A wave of foreclosures and evictions is about to sweep the United States in the wake of the sub-prime mortgage lending crisis.
This could destabilise the US housing market and may also lead to further turmoil in financial institutions, who collectively own $1 trillion (£480.6bn) worth of sub-prime debt.
Cleveland, Ohio, is an industrial city on the banks of Lake Erie in the US "rust belt".
It is the sub-prime capital of the United States. One in ten homes in the city is now vacant, and whole neighbourhoods have been blighted by foreclosed, vandalized and boarded-up homes.
Families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods Michael J Calhoun Center for Responsible Lending
Many of these homes are now owned by the banks and investment pools owning the mortgages, and the company making the most foreclosures in Cleveland is Deutsche Bank Trust, which acts on behalf of such investment pools.
Cleveland is facing a rising crime wave, and the cost of demolishing the vacant houses alone will cost the city $100m of its tax base.
According to Jim Rokakis, the County Treasurer for Cleveland's Cuyahoga County, "Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city".
Sub-prime crisis growing
Sub-prime lending is spreading across the United States, especially in the booming housing markets of Southern California, Florida, Washington, DC, and New York City.
One in five US mortgages now falls in this category. As the credit crunch continues to bite "families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods," says Michael Calhoun of the Center for Responsible Lending, which tracks these issues.
Sub-prime mortgages carry a much higher risk of default by the borrower than other kinds of mortgage lending.
That is because most of them are "balloon" mortgages (technically known as hybrid-adjustable rate mortgages, or ARMs), which offer the borrower a fixed-rate loan for two or three years, and then switch to a much higher adjustable rate after that.
HAVE YOUR SAY Everyone is going to feel this credit crunch to some extent Turned Worm
Many of them are set to switch in the next two years, leaving borrowers unable to afford the higher payments.
There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress's Joint Economic Committee.
Crisis origins
But why have so many people in the US taken out sub-prime mortgages?
The sub-prime lending market started as a way of lending to people with poor credit history - as long as they had collateral like a house that could be used to guarantee the loan.
It was particularly prevalent in inner-city areas, especially among black and Hispanic borrowers.
Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products.
Some customers were not told that their interest rates would go up sharply after two years; others were promised they could refinance their home before higher rates took effect.
Others found that when they had difficulties paying, huge unexplained fees were added to their bills, putting them further in debt.
Marion's story
One person hard hit is Marion Gardner, who lives in one of the worst affected sub-prime lending areas of Cleveland, known as Slavic Village.
A single parent, she had worked hard to buy a house where she could raise her two children and escape from the misery of the inner-city housing projects.
Two years ago Marion fell ill, and found she could not manage the stairs in her house.
She decided to refinance her home, using some of the money to buy an apartment where she could more easily manage.
She gave her old house to her two sons, expecting they would contribute to paying for the property she had struggled so hard to obtain. But the sons fell behind in their payments.
Marion went to her lender - Countrywide, the biggest sub-prime lender in the US - and offered to pay off all the arrears.
She said they accepted her offer, and began sending them $1,000 every month, using up her retirement savings.
But after six months she discovered that instead of clearing her arrears, her home was going to be foreclosed by Countrywide.
She still visits the house every day, trying to protect if from drug dealers and burglars, and leaves her dog in the backyard.
But she can see all along her street dozens of foreclosed properties that have been vandalised, boarded up, or gutted.
Now she has learned that a date has been set for the sheriff to come and evict her.
Deceptive practices?
Mark Seifert, the director of the East Side Organising Project (ESOP) in Cleveland, which has played a leading role in helping people affected by the sub-prime crisis, says Marion's story is typical.
SUB-PRIME CRISIS SERIES
Special reports on why bad US home loans are affecting us all
Friday: US housing crash
Monday: Financial meltdown
He says lenders engaged in deceptive practices and clients found it difficult to get any information at all when they got into arrears.
Mr Seifert says that ESOP - using protest tactics - has managed to get a few mortgage companies to sign a deal agreeing a uniform set of criteria to decide whether someone's mortgage qualifies for renegotiation rather than foreclosure.
But he says they have been unable to reach such an agreement with Countrywide, the nation's largest sub-prime lender - although its boss has promised to meet them.
Spreading to the suburbs
The crisis has spread beyond the inner city to the suburbs of Cleveland.
Last month over 200 people turned up at a church meeting to seek ESOP's help in avoiding foreclosure.
Some, such as Ron Todd, who lives in a suburb just south of the city, are in danger of losing their home after being made redundant by Northwest Airlines, a big local employer.
Others are worried that their neighbourhoods - and the property values of their own houses - will be ruined by the foreclosures all around them.
According to Claudia Coulton, co-director of the Centre for Urban Poverty at Case Western Reserve University in Cleveland, over 10,000 families - one in eight of all owner occupiers in Cleveland - will face eviction this year - and the number is expected to rise.
She says the crisis is threatening to "overwhelm the government agencies and community organisations that address the problem".
Nationwide problem
Cleveland's situation is not unique.
All around the country, aid agencies report a "tidal wave" of foreclosure cases, says Sarah Gerecke, director of New York City's Neighborhood Housing Services.
PREDATORY LENDING PRACTICES
Ninja Loans: no income, no job, no assets
2/28: Mortgages that change from a fixed to a much higher adjustable rate after first two years
Prepayment penalties: High fees for trying to change terms of mortgage
She now employs six people full-time to provide mortgage debt counselling, up from one just two years ago, and could use another 12.
Her concern is that many recently regenerated neighbourhoods in New York will soon be blighted by crisis again.
Some people argue that the sub-prime lending crisis has been caused by irresponsible borrowers who lied about their income to cash in on the housing boom. Ms Gerecke disagrees. She says few of her clients would knowingly put their home at risk.
Many sub-prime borrowers report that mortgage brokers misrepresented the kind of mortgage they were being offered, their annual income, and even the value of their home.
Working together?
President George W Bush's administration wants to solve the foreclosure crisis by getting lenders and borrowers to renegotiate the terms of loans.
There is a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works Robert Steel US Treasury Under Secretary for Domestic Finance
It is pledging more money for advice services, and has been urging key lenders to take a more sympathetic approach.
Robert Steel, the US Treasury Under Secretary for Domestic Finance, told the BBC that the government's role was "to ensure that lenders and servicers are being flexible with regard to working with borrowers".
He added that no policy could eliminate foreclosures altogether because there was "a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works."
But according to Mark Zandi, chief economist for Moody's, only 1% of sub-prime mortgages have been renegotiated rather than foreclosed so far.
Ms Gerecke says a piecemeal approach involving millions of individual renegotiations will not work. Each case takes hours of negotiations, and the mortgage companies' loan loss departments are overwhelmed by the crisis.
A way out?
The only way out, says Ms Gerecke, would be national loan terms agreed for the whole industry.
One such plan has been proposed by Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC), one of the key banking regulators.
She told the BBC that sub-prime interest rates should not be reset if the borrower has kept up all payments and is not in arrears.
But such a deal is proving extremely difficult to reach, given that thousands of investors around the world own a share of these sub-prime mortgages.
Meanwhile Marion still sits in her Cleveland home every day, trying to stop it being vandalised even though she knows it is merely a matter of time before she will be evicted.
"I am just really working for the banks now, protecting their property from damage," she says.
Story from BBC NEWS:
By Steve Schifferes BBC economics reporter, Cleveland, Ohio
A wave of foreclosures and evictions is about to sweep the United States in the wake of the sub-prime mortgage lending crisis.
This could destabilise the US housing market and may also lead to further turmoil in financial institutions, who collectively own $1 trillion (£480.6bn) worth of sub-prime debt.
Cleveland, Ohio, is an industrial city on the banks of Lake Erie in the US "rust belt".
It is the sub-prime capital of the United States. One in ten homes in the city is now vacant, and whole neighbourhoods have been blighted by foreclosed, vandalized and boarded-up homes.
Families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods Michael J Calhoun Center for Responsible Lending
Many of these homes are now owned by the banks and investment pools owning the mortgages, and the company making the most foreclosures in Cleveland is Deutsche Bank Trust, which acts on behalf of such investment pools.
Cleveland is facing a rising crime wave, and the cost of demolishing the vacant houses alone will cost the city $100m of its tax base.
According to Jim Rokakis, the County Treasurer for Cleveland's Cuyahoga County, "Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city".
Sub-prime crisis growing
Sub-prime lending is spreading across the United States, especially in the booming housing markets of Southern California, Florida, Washington, DC, and New York City.
One in five US mortgages now falls in this category. As the credit crunch continues to bite "families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods," says Michael Calhoun of the Center for Responsible Lending, which tracks these issues.
Sub-prime mortgages carry a much higher risk of default by the borrower than other kinds of mortgage lending.
That is because most of them are "balloon" mortgages (technically known as hybrid-adjustable rate mortgages, or ARMs), which offer the borrower a fixed-rate loan for two or three years, and then switch to a much higher adjustable rate after that.
HAVE YOUR SAY Everyone is going to feel this credit crunch to some extent Turned Worm
Many of them are set to switch in the next two years, leaving borrowers unable to afford the higher payments.
There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress's Joint Economic Committee.
Crisis origins
But why have so many people in the US taken out sub-prime mortgages?
The sub-prime lending market started as a way of lending to people with poor credit history - as long as they had collateral like a house that could be used to guarantee the loan.
It was particularly prevalent in inner-city areas, especially among black and Hispanic borrowers.
Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products.
Some customers were not told that their interest rates would go up sharply after two years; others were promised they could refinance their home before higher rates took effect.
Others found that when they had difficulties paying, huge unexplained fees were added to their bills, putting them further in debt.
Marion's story
One person hard hit is Marion Gardner, who lives in one of the worst affected sub-prime lending areas of Cleveland, known as Slavic Village.
A single parent, she had worked hard to buy a house where she could raise her two children and escape from the misery of the inner-city housing projects.
Two years ago Marion fell ill, and found she could not manage the stairs in her house.
She decided to refinance her home, using some of the money to buy an apartment where she could more easily manage.
She gave her old house to her two sons, expecting they would contribute to paying for the property she had struggled so hard to obtain. But the sons fell behind in their payments.
Marion went to her lender - Countrywide, the biggest sub-prime lender in the US - and offered to pay off all the arrears.
She said they accepted her offer, and began sending them $1,000 every month, using up her retirement savings.
But after six months she discovered that instead of clearing her arrears, her home was going to be foreclosed by Countrywide.
She still visits the house every day, trying to protect if from drug dealers and burglars, and leaves her dog in the backyard.
But she can see all along her street dozens of foreclosed properties that have been vandalised, boarded up, or gutted.
Now she has learned that a date has been set for the sheriff to come and evict her.
Deceptive practices?
Mark Seifert, the director of the East Side Organising Project (ESOP) in Cleveland, which has played a leading role in helping people affected by the sub-prime crisis, says Marion's story is typical.
SUB-PRIME CRISIS SERIES
Special reports on why bad US home loans are affecting us all
Friday: US housing crash
Monday: Financial meltdown
He says lenders engaged in deceptive practices and clients found it difficult to get any information at all when they got into arrears.
Mr Seifert says that ESOP - using protest tactics - has managed to get a few mortgage companies to sign a deal agreeing a uniform set of criteria to decide whether someone's mortgage qualifies for renegotiation rather than foreclosure.
But he says they have been unable to reach such an agreement with Countrywide, the nation's largest sub-prime lender - although its boss has promised to meet them.
Spreading to the suburbs
The crisis has spread beyond the inner city to the suburbs of Cleveland.
Last month over 200 people turned up at a church meeting to seek ESOP's help in avoiding foreclosure.
Some, such as Ron Todd, who lives in a suburb just south of the city, are in danger of losing their home after being made redundant by Northwest Airlines, a big local employer.
Others are worried that their neighbourhoods - and the property values of their own houses - will be ruined by the foreclosures all around them.
According to Claudia Coulton, co-director of the Centre for Urban Poverty at Case Western Reserve University in Cleveland, over 10,000 families - one in eight of all owner occupiers in Cleveland - will face eviction this year - and the number is expected to rise.
She says the crisis is threatening to "overwhelm the government agencies and community organisations that address the problem".
Nationwide problem
Cleveland's situation is not unique.
All around the country, aid agencies report a "tidal wave" of foreclosure cases, says Sarah Gerecke, director of New York City's Neighborhood Housing Services.
PREDATORY LENDING PRACTICES
Ninja Loans: no income, no job, no assets
2/28: Mortgages that change from a fixed to a much higher adjustable rate after first two years
Prepayment penalties: High fees for trying to change terms of mortgage
She now employs six people full-time to provide mortgage debt counselling, up from one just two years ago, and could use another 12.
Her concern is that many recently regenerated neighbourhoods in New York will soon be blighted by crisis again.
Some people argue that the sub-prime lending crisis has been caused by irresponsible borrowers who lied about their income to cash in on the housing boom. Ms Gerecke disagrees. She says few of her clients would knowingly put their home at risk.
Many sub-prime borrowers report that mortgage brokers misrepresented the kind of mortgage they were being offered, their annual income, and even the value of their home.
Working together?
President George W Bush's administration wants to solve the foreclosure crisis by getting lenders and borrowers to renegotiate the terms of loans.
There is a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works Robert Steel US Treasury Under Secretary for Domestic Finance
It is pledging more money for advice services, and has been urging key lenders to take a more sympathetic approach.
Robert Steel, the US Treasury Under Secretary for Domestic Finance, told the BBC that the government's role was "to ensure that lenders and servicers are being flexible with regard to working with borrowers".
He added that no policy could eliminate foreclosures altogether because there was "a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works."
But according to Mark Zandi, chief economist for Moody's, only 1% of sub-prime mortgages have been renegotiated rather than foreclosed so far.
Ms Gerecke says a piecemeal approach involving millions of individual renegotiations will not work. Each case takes hours of negotiations, and the mortgage companies' loan loss departments are overwhelmed by the crisis.
A way out?
The only way out, says Ms Gerecke, would be national loan terms agreed for the whole industry.
One such plan has been proposed by Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC), one of the key banking regulators.
She told the BBC that sub-prime interest rates should not be reset if the borrower has kept up all payments and is not in arrears.
But such a deal is proving extremely difficult to reach, given that thousands of investors around the world own a share of these sub-prime mortgages.
Meanwhile Marion still sits in her Cleveland home every day, trying to stop it being vandalised even though she knows it is merely a matter of time before she will be evicted.
"I am just really working for the banks now, protecting their property from damage," she says.
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