Richard Lord believes the essence of the American dream -- working class homeownership -- is being jeopardized by so-called "subprime" mortgages and mounting foreclosures, and he wants people to read about it.

	Richard Lord

That was the impetus behind a series of articles the investigative reporter wrote for the alternative newsweekly, City Paper, which have been turned into a book, "American Nightmare: Predatory Lending and the Foreclosure of the American Dream."

Subprime mortgages are loans made at rates that far surpass prevailing mortgage rates; such loans have long been offered to people with poor or no credit histories. In his book and the articles, Lord describes the explosive growth of subprime lending: Such lenders made $332 billion in subprime loans last year, up from $35 billion in 1994, when they were just a niche player in the lending industry.

Lord intersperses such statistics with narratives of people seduced into high-interest loans, only to face foreclosure when they could not make the payments -- and sometimes even when they did. People such as C.J. and Jill Eselman, whose mortgage application was doctored by the lender to show more income than they had; Sean Ennis, who consolidated his debts with a mortgage at 10.5 percent interest and a line of credit at 20 percent interest, when the prevailing mortgage rate was 7 percent; and Albert Blank, who, at 90, was offered two mortgages totaling nearly $36,000 on a property valued at $12,200.

But Lord also goes beyond both statistics and anecdotes to explore connections between subprime lenders, contractors, Wall Street and ultimately, the government itself, noting that initiatives to curtail abuses in the subprime market tend to fall short in their implementation.

The book may be read as a call to reform. At the very least, it is a call for individual caution. At one point or another, nearly all of the stories Lord tells hinge on a borrower's lack of knowledge. To equip readers, he closes the book with a long list of questions to ask before buying a home or getting a mortgage.

Lord recently sat down with the Post-Gazette for a question-and-answer session.

Q: What lies behind the dramatic growth in subprime lending?

A: What really set the plate was in 1986 when the federal government said that the only form of interest that was tax-deductible was mortgage interest. That created an impetus for refinancing.

But what really got it going was when Wall Street got a taste for high-interest loans.

Before about 1994 or 1995, Wall Street understood that you could buy regular prime mortgages on the market. Starting in '94, Wall Street starts to think, "Hey, here we've got these subprime loans, the interest rate is higher, therefore the return on investment can be higher. It's a little riskier than prime loans because the default rate is going to be higher, but it's probably not going to be as volatile as the stock market."

So we go from having $35 billion in subprime loans made in 1994 and $11 billion of those sold on Wall Street, to having $332 billion in subprime loans made last year, and $203 billion sold on Wall Street.

Q: Who's buying them?

A: Mutual fund companies, regular banks, pension funds, insurers -- insurers are big buyers of these things.

My thesis is that what's happening on Main Street with people knocking on doors and getting you into loans that you can't afford is definitely tied to the fact that Wall Street is buying 18 times more of these things per year than they were 10 years ago. And this year, they'll set a new record, guaranteed.

Q: In your book, you quote one lender's spokesman who says, "Our goal is not to obtain and sell real estate" when it comes to foreclosures.

A: That's true. For the most part, lenders do not wish to take a home. However, increasingly, especially in the subprime market, they consider a reasonably high percentage of foreclosures to be an acceptable cost of doing business.

Q: Toward the end of the book, you talk about an entity called MERS, saying it "represents the future of foreclosure: a brave new world of anonymity and unaccountability." What is MERS, and why do you say that?

A: MERS -- Mortgage Electronic Registration Systems -- is this entity that markets itself as a way to get around all the fees these companies have to pay when they trade these loans. Each time a company transfers a loan to another company, it has to file a change at the recorder of deeds office in the county in which the mortgage was made.

With MERS, they can avoid the fees by immediately kicking the loan into this holding entity's hands, and then they can trade it around as much as they like among themselves. The holding entity is the one on file at the recorder of deeds office, and they don't have to pay those fees.

But it's also a way to obscure what's happening. When I see Mortgage Electronic Registration Systems as the foreclosing entity, I don't automatically know if that's a prime or a subprime lender, I don't know who originated the loan.

It just makes it all that much tougher to figure out who's making the bad loans, and I can't help but believe that that's one of the secondary benefits of using MERS.

Q: Where do you see things going in terms of any possible federal action surrounding these issues?

A: In a somewhat scary direction. When the Clinton administration got around to looking at predatory lending, around 1998, it produced a report that was released in June of 2000 which included about 25 suggestions that, in total, would have been a pretty significant effort to curtail the worst abuses in subprime lending.

When you look at all of these 25 suggestions, about half of them have been acted upon, and many of them have been sort of half done. The half-measures that have been taken in the past four years have done very little to curb subprime lenders' excesses.

States and cities have stepped into the breach and tried to pass strong anti-predatory lending measures. But at each step, the mortgage lending industry goes one step higher and says, "Hey you can't do that."

I think that what we're going to see is renewed impetus to pass a bill that squashes state and local reforms and replaces them with fairly empty federal reform.

The book is available via the Web at the publisher's Web site, www.commoncouragepress.com, as well as at www.amazon.com.