RAY SUAREZ: Now, a two-part look at the growing fallout from the troubled housing market. We begin with a report on the rising rates of foreclosure and the consequences as seen in one particularly hard-hit city, Baltimore.
As hundreds of thousands of American families lose their homes, the courthouse steps is the last stop.
AUCTIONEER: Anybody want to bid on this property?
RAY SUAREZ: The end of a road, a public auction of mostly foreclosed properties. It’s an open-air auction, bidders often representing buyers on the other end of the cell phone. This sale put houses from Baltimore City and the surrounding county on the auction block.
The city of Baltimore has seen a skyrocketing foreclosure rate. According to RealtyTrac, foreclosures in the Baltimore area increased 544 percent between 2006 and 2007.
Slumping home values continue to put more mortgages in trouble, stripping out precious equity and putting homeowners closer to the edge. Rising unemployment and tighter credit makes it harder for a homeowner in trouble to sell.
AUCTIONEER: The third and final call. Sold, $200,700.
RAY SUAREZ: Laurence Whitter is a small investor who frequents property auctions like this one. He’s not buying a place to live in. This will be an investment.
LAURENCE WHITTER: A lot of guys here that are fairly sophisticated long-term investors and usually people who are fairly decently bankrolled.
RAY SUAREZ: Plenty of properties headed for the auctioneer’s gavel are here around Baltimore’s Reservoir Hill neighborhood. The mortgage meltdown has moved it from gentrification to a foreclosure hotspot.
MAYOR SHEILA DIXON (D), Baltimore: You have to look at the whole area in perspective.
RAY SUAREZ: Mayor Sheila Dixon insists it’s not just the downturn in the market or bad times locally or nationally in housing that’s pulling Reservoir Hill down.
MAYOR SHEILA DIXON: I mean, this was a very thriving community at one point in time. It went down. People realized the wealth and the type of properties of these brownstone houses and the value that it had. People began to do individual renovations, as well as some collective efforts.
RAY SUAREZ: But as the housing market has gotten worse, things changed.
MAYOR SHEILA DIXON: What we’ve found is that, you know, people make an investment to buy, can’t maintain based on the types of loans and mortgages that they get, and that this is clearly a foreclosure area.
Allegations of discrimination
RAY SUAREZ: The surge in foreclosures has hit many neighborhoods here, so Baltimore is suing Wells Fargo, saying the city's number-one lender saddled black homebuyers with more expensive home loans than white buyers.
Can Baltimore go into a court and prove that it's because of race rather than any other factors?
MAYOR SHEILA DIXON: Well, if you take the same area or type of loan that is given to a white individual compared to the same income level, same credit, you can see a margin difference in the type of loan that is being provided to African-Americans.
And we're finding that, over the next two years, we could have in default close to 4,000, 5,000 additional families who will be losing their homes as a result of this because of being put into those types of loans.
RAY SUAREZ: Larry Platt is a Washington attorney who specializes in representing banks and mortgage lenders. He said the majority of home loans to black owners in Baltimore were conventional loans, not subprime with exotic conditions or rapidly escalating interest.
LARRY PLATT, Mortgage Lawyer: Merely being the largest or the second-largest lender in Baltimore and making fixed-rate loans to African-American borrowers with impaired credit, that doesn't prove anything to me other than I think Wells Fargo has probably been a better community citizen than other financial institutions because of their willingness to lend in Baltimore at such high levels.
RAY SUAREZ: Wells Fargo would not grant the NewsHour an interview about the Baltimore lawsuit. The bank released a statement, which says in part, "The Baltimore lawsuit is not supported by facts and misrepresents how Wells Fargo does business. We will vigorously fight these unfounded allegations, and we will win."
"We do not tolerate misleading or fraudulent lending practices. When making lending decisions, factors such as race or gender are not considered. We offer prime pricing in all communities to all consumers who are eligible. We do not target communities with non-prime loans."
Baltimore City officials aren't the only ones taking action against lenders. Cleveland and Buffalo have also filed suits.
RAY SUAREZ: Baltimore City officials aren't the only ones taking action against lenders. Cleveland and Buffalo have also filed suits.
The cities are using different laws to sue, but all see the same problem arising from widespread defaults: so many properties, so close together, standing vacant with an uncertain future.
A foreclosed house is contagious, dragging down properties around it, according to Margaret McFarland, who teaches real estate development at the University of Maryland.
MARGARET MCFARLAND, University of Maryland: At best, they won't be climbing. At worst and most likely, they will be declining. So anyone who still owns a property in that neighborhood has a declining asset.
On top of that, it just affects the social fabric of the neighborhood, safety being the most important thing for us humans after shelter. And now you've affected the value of the shelter, and you've affected the safety of the neighborhood. Eyes on the street get fewer and fewer, and therefore safety declines.
RAY SUAREZ: When the mayor surveys empty row houses, she sees property that can't chip in much to keep her city running.
So you get a hit on the real estate taxes again?
MAYOR SHEILA DIXON: You get hit on the real estate taxes, which means, which translates for us into less money we can put into schools, less money we can put into crime-fighting efforts, less money into cleaning up and providing adequate and quality police and fire protection. All of that is services that we provide to our constituents based on the property tax.
Risks to inexperienced buyers
RAY SUAREZ: Exactly, Larry Platt said. Why blame Wells Fargo for a declining tax base when the bank got no credit during a real estate boom that filled Baltimore's coffers?
LARRY PLATT: They took tax revenues from real estate transactions. They took sales tax from consumer goods and services that were bought through cash-out refinancings. And I didn't hear anybody complaining about any of that.
It's just that when all of a sudden that revenue dries up, somehow it must be the big, bad lenders' fault. I think it's really -- you know, it's a sad claim. I just don't buy it.
RAY SUAREZ: Platt adds that, not all that long ago, lenders were accused of not being willing to do business in urban areas, not willing to lend to minority homebuyers.
In the 1990s and the earlier years of this decade, banks and buyers changed the rules of the game. Even as house prices grew much faster than incomes, lots of people who wouldn't have gotten loans before were able to buy with smaller down payments.
MARGARET MCFARLAND: That seemed like a good thing. And to a certain degree, it was. It put a lot more people into homes who really, you know, deserved to be there.
When it went over the edge, where the aggressive desire to purchase mortgages with a lot of external capital started pushing loans that were beyond aggressive, to the point that they were predatory, then you end up with expanding the market beyond what it could support. And that's what seems to have happened.
RAY SUAREZ: What was the purchase price on the house?
MYCHALL DENULLY: $249,000.
RAY SUAREZ: $249,000. And you had how much to put down?
MYCHALL DENULLY: I had close to maybe $3,000 to $5,000 to put down.
RAY SUAREZ: Mychall DeNully and his family are part of the human cost of the mortgage meltdown. He made a lot of rookie mistakes buying his first house. He didn't work with an agent, then let the seller find his mortgage broker and his appraiser.
Despite a good mid-600s credit score that should have put a fixed rate loan within his reach, DeNully got a subprime interest rate and overpaid while home prices were declining.
After serious damage from sewer problems laid even more expense onto a higher-than-expected mortgage payment, DeNully looked into refinancing. But the house for which he paid $249,000 appraised at just $180,000. He'll be forced out in a few weeks.
MYCHALL DENULLY: Well, me and my wife, we're just going to move on. You know, we're just going to try to find a place to rent or whatever and move out and just move on. Basically, I'm upset and I'm mad, but, then again, you know, I think this is -- it was just a learning experience for me and my family.
RAY SUAREZ: Even with his first-time buyer's mistakes, a rising market might have helped this young family keep its house. But now its small equity gone, his credit score wrecked, DeNully said he's petrified about trying to buy again.
John Taylor of the nonprofit National Community Reinvestment Coalition found DeNully's story sad and typical.
JOHN TAYLOR, President and CEO, National Community Reinvestment Coalition: The people getting burned were disproportionately people of color and working-class Americans who had no idea that they were caught up in this fast and easy financing scheme in which brokers and lenders got their fees, didn't have to worry about the long-term viability of the mortgage, and in the end the ones who lose the most wealth are the homeowners.
RAY SUAREZ: In an era of declining prices and no more easy money, Taylor says people are going to have to buy homes the old-fashioned way: work hard, save money, get your credit score up. Better to wait years longer to buy than end up out on the street.
But what if you didn't? Joe Cox is a community organizer with the Association of Community Organizations for Reform Now, or ACORN.
So somebody comes in. They know they're in trouble. They're going to have an increase in their interest rate or suddenly they're going to have to come up with a lot of cash in, let's say, 90 days. What are their options? What can they do to save their house?
JOE COX, Community Organizer, ACORN Housing: You need to speak to HUD-certified loan counseling agency, like ACORN Housing, or any of the counseling agencies that HUD recommends.
You know, nonprofit housing counseling agencies are the best source for non-biased, third-party advice. They're just going to look at everything and say, "OK, well, your income looks like this, so I think the loan company might agree to a modification." Or they'll say, "OK, well, you're not that delinquent. Maybe we can convince some of our partners to help you with a refinance."
RAY SUAREZ: Back at the auction, Laurence Whitter won the property he was bidding for without any trouble.
LAURENCE WHITTER: It's not for someone who thinks they can just get a good deal. You have to be careful. You have to really be careful.
RAY SUAREZ: Sound advice, perhaps too late for millions of Americans facing foreclosure.