Immigrants hit hard by slowdown, subprime crisis

WASHINGTON (Reuters) - As an economic slowdown and the subprime mortgage crisis deepen across the United States, Hispanic immigrants are increasingly in danger of losing their jobs and their homes.

Both legal and illegal immigrants joined Americans in buying homes they could barely afford when the market spiraled upward and many have been caught with mortgages higher than the value of their homes as prices have slumped in the past year.

Just as subprime mortgage payments rose and house prices fell, the economy's slowdown has hurt the construction sector, which employs large numbers of Hispanics and other immigrants.

Unemployment among Hispanics in the United States jumped to 6.3 percent in December, up from 5.7 percent the previous month and well above the national average of 5 percent, U.S. Department of Labor statistics show.

And almost half of the mortgage loans in the hands of Hispanics are subprime, making them especially vulnerable to the housing downturn.

"Economic conditions are deteriorating and many immigrants now can't work those extra hours or find that second job to keep up with their mortgage payments," said Aracely Panameno at the Center for Responsive Lending (CRL) research policy group.

Nelson, a 29-year-old legal immigrant and construction worker from El Salvador, had a miserable run of luck in November, when he lost his job and his subprime mortgage bills jumped $650 to about $2,650.

He says he now has to sell the home he bought in Maryland in 2005. If he is unable to sell in the next four months, he will have to foreclose, meaning an even bigger financial loss and a damaging black mark on his credit record.
I have to practically give it away," he said.

Like many caught up in the crisis, the father of three said he had no idea his monthly payments would soar two years into the mortgage when he closed the adjustable-rate subprime deal.

"You have to sign a lot of things when you buy a house, so I didn't read, I just signed. I think it was the anxiety, the happiness of buying my house," he said. "I feel a bit betrayed."

RECESSION FEARS

U.S. President George W. Bush and Congressional leaders are working on an economic stimulus package worth almost $150 billion to fend off a possible recession, and Bush last month unveiled a plan to slow the wave of home loan foreclosures by freezing the rates on some subprime loans.

But experts say most of the immigrants in financial trouble are either not entitled to help under the rescue plan or are not taking advantage of it.

There are around 43 million Hispanics in the United States, making them the country's largest minority, and Mexicans and Central Americans account for the vast majority of some 12 million illegal immigrants.

Tighter immigration laws and police raids have added further pressure on illegal workers and residents.

"There is less work, and more fear (of deportation)," said one Mexican illegal immigrant who lives with his family in Kansas. "Employers are relying more and more on you having a Social Security number in order."
Although there is no formal tally, Mexican consular sources say a growing number of illegal immigrants across the United States are starting to pack their bags and return home.

Illegal immigrants were able to buy U.S. homes during the boom years, either by showing evidence that they pay taxes or by simply presenting false documents.

Many of them took out high interest fixed-rate loans or subprime mortgages with a low entry rate that later rose sharply. Experts say language difficulties made them more vulnerable to being offered, and taking, bad deals.

"They were more exposed to abuse," said Alejandra Louden of the Congressional Hispanic Caucus Institute's housing department, which carried out a recent study on Latino home loan foreclosures. "Documents were in English and explained in Spanish, and some vital explanation would be missing."

FBI Probes 14 Companies Over Home Loans

WASHINGTON (AP) -- The FBI on Tuesday said it is investigating 14 companies for possible accounting fraud, insider trading or other violations in connection with home loans made to risky borrowers.

Agency officials did not identify the companies under investigation but said the wide-ranging probe, which began in spring 2007, involves companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors.

The Federal Bureau of Investigation is working in conjunction with the Securities and Exchange Commission on the corporate-fraud probe, said Neil Power, chief of the FBI's economic crimes unit in Washington.

As the nation's housing crisis worsens, there has been a dramatic spike in the number of mortgage fraud cases under investigation. An agency spokesman said 1,210 such cases are open, up from roughly 800 a year ago.

The announcement comes weeks after authorities in New York and Connecticut said they are investigating whether Wall Street banks hid crucial information about high-risk loans bundled into securities sold to investors.

Power said the FBI is looking into the practices of so-called subprime lenders, as well as potential accounting fraud committed by financial firms that hold these loans on their books or securitize them and sell them to other investors.

Referring to certain unnamed bankrupt subprime lenders, Power said there are "some irregularities there that we're looking into," including the timing of stock sales by executives. Dozens of subprime lenders have filed for bankruptcy in the past year, most prominently New Century Financial Corp.

"We're looking at the executives to see if they were committing insider trading," Power said.

Power also said law enforcement officials are looking at whether homebuilders manipulated financial statements to inflate revenues.

An SEC spokesman declined to comment. The agency has said about three dozen investigations related to the mortgage market meltdown are ongoing.Defaults on subprime loans have risen over the past 12 months and are primarily responsible for the credit crunch that has disrupted global financial markets.

Morgan Stanley, Goldman Sachs Group Inc. and Bear Stearns Cos. all disclosed in regulatory filings Tuesday that they are cooperating with requests for information from various, but unspecified, regulatory and government agencies. Officials at the companies either declined to comment, or could not immediately be reached.

FBI officials also highlighted what they called a growing pattern of suspected mortgage loan fraud potentially committed when loans were made to shaky borrowers. They cited a surge in "suspicious activity reports" that banks are required to file with the government.

The number of those reports is projected to rise to 60,000 this year after hitting 48,000 last year, up from about 7,000 in 2003. "We're going to have to take a hard look at these things," said Assistant FBI Director Ken Kaiser.

Earlier this month, Connecticut Attorney General Richard Blumenthal said he and New York Attorney General Andrew Cuomo were looking whether banks properly disclosed the high risk of default on so-called "exception" loans - considered even risker than subprime loans - when selling those securities to investors.

In November, Cuomo said he issued subpoenas to government-sponsored mortgage companies Fannie Mae and Freddie Mac in his investigation into what he claims are conflicts of interest in the mortgage industry. He said he wanted to know about billions of dollars of home loans they bought from banks, including the largest U.S. savings and loan, Washington Mutual Inc., and how appraisals were handled.

US housing slump raises hopes of second cut in interest rates in eight days

The hope of a second cut in interest rates in eight days from the US Federal Reserve helped steady frayed nerves on the world's stockmarkets last night, after a day of jittery trading prompted by concerns about global recession.

Renewed evidence of the depths of the housing slump in the US left Wall Street convinced that the US central bank would follow last week's 0.75 percentage point reduction in its base lending rate with another half-point cut tomorrow night.

The prospect of a fifth cut in US interest rates since September put downward pressure on the dollar and pushed investors into the safe haven of gold, which rose to a record level of $929.20 an ounce during London trading yesterday.

An early rally on Wall Street arrived too late to spare European bourses from the knock-on effects of big overnight falls in Asia, although losses were pared back after the steady start in New York. Shares in Hong Kong, Tokyo and Shanghai all had hefty falls on fears that exports from the region would suffer from a US slump.

The FTSE 100 clawed back some of its losses after the start of business in New York but still closed 80.1 points lower at 5788.9. On Wall Street, the Dow Jones industrial average was 100 points higher, with traders convinced that the Fed had no choice but to cut rates to 3% in view of data showing new home sales down by more than a third on a year earlier.

Dimitry Fleming, an economist at ING Financial Markets, said: "No matter which way you look at it, the December new home-sales report is simply awful." In December, demand for new homes dropped 4.7% month on month to an annual rate of 604,000 - the lowest level since February 1995.

He added that in the three months to December, new home sales fell at an annualised rate of 35% and for 2007 as a whole were down 26% on 2006 - the weakest performance since official figures were first collected in 1963.

The biggest declines were in the south and west - regions unaffected by the bad weather in the east and the mid-west.

Charles Dumas, of Lombard Street Research, said: "US new homes-sales data for December today reinforced the likelihood of at least a consumer recession."

Cuts in interest rates make the dollar less attractive to investors than higher-yielding currencies. Yesterday the euro rose 0.8% to $1.4790, its fourth gain in five trading sessions.

The dollar also lost ground against the pound. Sterling edged up from $1.9825 to $1.9860 but fell against most other currencies after David Blanchflower, a member of the Bank of England's monetary policy committee, said interest rates in the UK were "restrictive". Blanchflower said in a Guardian interview yesterday that focusing too much on inflation was "like fiddling while Rome burns".

Home prices in 10 cities drop a record in Nov

Home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November, suggesting the housing slump is worsening, according to a Standard & Poor index released on Tuesday.

The decline in the S&P/Case-Shiller Home Price Index topped the 6.7 percent annual drop for October and was deeper than predicted by economists at Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. The consensus was for a 7.1 percent fall, Goldman economists said.

Home prices across big cities have now declined for 11 consecutive months and show little sign of bottoming, said economists, including Robert Shiller, a founder of the index and chief economist at MacroMarkets LLC. The decline in the index accelerated to 2.2 percent in November over October, from 1.4 percent in the previous month, S&P said.

It "confirms our outlook that the housing shock is by no means over," said Michelle Meyer, an economist at Lehman Brothers in New York. "Home prices are falling in response to weak demand, which is a function of buyer sentiment and tight credit conditions."

Falling U.S. home prices in the past year have fueled rising delinquencies and foreclosures, with homeowners unable to get out of costly loans. Banks and investors, throttled by losses in risky mortgages, have sharply curtailed financing for all but the most credit-worthy borrowers.

A broader but newer index of 20 cities recorded an annual decline of 7.7 percent in November, S&P said. Miami and San Diego led with annual declines of 15.1 percent and 13.4 percent respectively.

"While the sharpest decline in home prices has decidedly been in the once-hot regions such as Miami and San Diego, the weakness is spreading throughout the nation," Meyer said in a research note.

Other double-digit year-over-year declines were in Las Vegas, Detroit, Phoenix, Tampa and Los Angeles.

$820 Billion at risk In sub-prime crisis

Banks may need to raise as much as $143 billion to weather the credit crisis, Barclays Capital reports.

They say the banks will need extra money if bond insurers, who insure the products at the centre of the sub-prime crisis, lose their top credit ratings.

If their credit ratings are cut, it could make it harder for them to pay out, leading to banks reporting bigger losses on sub-prime debt.

Fears about bond insurers helped spark off this week's stock market falls.

The world's largest banks have already admitted losing more than $100 billion from mortgage bonds gone bad.

$820 billion at risk

Analysts at Barclays Capital said banks own $820 billion of securities guaranteed by bond insurers.

"This is a huge amount, but the assumptions used are also very aggressive, designed only to show how, taken to its extreme..., bank capital could be influenced," the Barclays Capital report said.

Bond insurers, such as Ambac Financial Group and MBIA, have suffered billions of dollars of write-downs in recent months and are expected to sustain more, after insuring debt hit by the sub-prime mortgage crisis.

Investor fears

Many investors fear the insurers have too little capital given their obligations, and worry that a cut in their credit rating would make it more expensive for them to borrow money.

Ratings agency Fitch cut Ambac's rating last week, while rival agencies Moody's and Standard & Poor's are reviewing Ambac's and MBIA's ratings.

However, there is some optimism for the sector after reports that billionaire Wilbur Ross was in talks to acquire Ambac.

The reports follow comments this week from New York State regulators saying they would consider lending support to the struggling bond insurance industry.

Sub-prime exposure

Firms like Ambac are know as 'monoline' insurers and are at the centre of the sub-prime crisis.

The sub-prime market is focused on providing home loans to those with limited or poor credit histories.

Many of these mortgages were converted into financial instruments and sold on to investors including banks.

But a series of interest rate rises over the past two years has meant many sub-prime borrowers could no longer afford their monthly payments, causing them to default.

This led to a steep fall in the value of investments linked to sub-prime loans and has caused many banks to report massive losses.

Existing home sales in 2007 dropped by most in 25 years

The housing market reached another milestone in 2007, though not the kind that anyone wishes for.

For the first time in at least 40 years -- and possibly since the Depression -- the median price declined for an existing single-family home across the country, according to a report Thursday by the National Association of Realtors.

"It's the first annual drop since we started collecting data in 1968," association spokesman Walter Molony said. "Based on anecdotal information, academics agree the previous [such] decline was in the Great Depression."

The sobering announcement came on the same day that congressional leaders said they had tentatively agreed on an economic-stimulus program, which, among other things, would raise the loan limits for Fannie Mae and Freddie Mac. The government-sponsored enterprises may soon be allowed to back loans as high as $729,750, up from $417,000 now.

Backers hope the changes will put housing back on its feet and stop further price declines.

David Oser, chief economist for ShoreBank in Chicago, isn't too optimistic. "Things take a really long time to play out [in housing]," he said. "And even if we have reached a bottom, we're going to bump along at that bottom for a long time -- many months, perhaps a year before a recovery starts.

"The federal government can inject stimulus into the overall economy and do all sorts of things to put money into people's pockets, but when it comes down to housing itself, it gets solved family by family."

And families nationwide saw the median home price fall 1.4 percent in 2007 to $218,900, from $221,900 in 2006.

Also part of the data was the Realtors' analysis of existing-home sales in December, which were down 22 percent from a year earlier. The trade group said the national median existing-home price in December alone was down 6 percent, year over year.

Locally, the report was a little brighter in December. The Illinois Association of Realtors said prices were up 1.1 percent in the Chicago area, though off 6.6 percent statewide from a year earlier. Sales, however, were off 27.7 percent, the group said.

"We still haven't reached a bottom for the housing slump, nor do the data suggest that we are close," said Bernard Baumohl, managing director of the Economic Outlook Group, a forecaster in Princeton, N.J.

"But it wasn't all bad news," he said. "The months' supply of homes for sale dropped to 9.6 months, which was the lowest since August. And yes, 1.4 percent [in prices] is a decline, but it's not the end of the world. Last year's sales, 5.62 million, turned out to be the fifth-highest on record."

Little or no appreciation

"The average price is now back to the level of March 2005, which implies that many people who bought homes even two years ago have experienced no appreciation in their homes' worth," said ShoreBank's Oser. "Those who bought more recently are likely to live in homes that are worth less than they paid for them."

For Chad and Jeanine Smith, who bought a townhouse in northwest suburban Lakemoor in December 2002, the line between profit and breaking even -- or losing money -- is a fine one.

"I don't want to have to take a loss, though I'm afraid that might have to happen," he said.

The couple began trying to sell their home in April 2007, with several potential buyers visiting over the summer. But they've had no one look at the three-bedroom unit in several months. They've lowered their price to $203,900 from $207,000 and are thinking about asking $199,000, he said.

"I'd be happy with $199,000," Chad Smith said. "That would represent a profit, but not much."

The National Association of Realtors said single-family sales in December fared slightly better than those of condos, nationally, declining 21.6 percent and 24.5 percent, respectively.

The Illinois group doesn't break out sales for the two housing types. It said the collective median price in December was $247,800, up from $245,000 a year earlier. It also said that for all of 2007, home sales in the Chicago area totaled 92,656, down 20.5 percent from 116,527 in 2006. In 2005, the year the market peaked, 133,305 homes were sold.

Analysts said the reduction of inventory of homes for sale was slightly encouraging, but the figure may reflect sizable numbers of people who took their homes off the market during the holidays and who may soon relist them.

Then there's the rising flow of homes in foreclosure. Those properties are expected to land on the market in 2008 in record numbers.

"We have some additional downturn in sales to go and a downturn in prices in many parts of the country," said David Berson, chief economist for PMI Group, a private mortgage insurer. "The fall in prices is likely to be less as the year goes on, but we will still have that through 2008."

NYC sues Countrywide officers, underwriters

NEW YORK (Reuters) - New York City Comptroller William Thompson on Friday expanded a class-action law suit filed against Countrywide Financial Corp naming additional company officers and directors, 26 underwriters and two accounting firms.

Thompson, in a statement, said executives of Countrywide Financial, one the biggest U.S. mortgage lenders, "cashed out to the tune of almost $700 million" while borrowers lost homes and the value of investors' shares fell sharply.

"We will pursue every avenue to ensure that those who defrauded investors are held accountable for their actions," said Thompson, who helps run the city's pensions.

Firms sued, accused of home equity scams

A host of South Florida ''foreclosure prevention'' companies and individuals were sued by the attorney general, who accused them of scamming dozens of homeowners out of home equity.

Florida's attorney general sued seven South Florida companies and 12 individuals who allegedly peddled programs offering to help struggling homeowners avert foreclosure but instead left residents deeper in debt and, often, still fighting for their homes.

Attorney General Bill McCollum also announced proposed legislation aimed at stamping out ''foreclosure prevention'' scams. The law seeks to make sure homeowners are making fully informed decisions and allows them to change their minds within five days of signing.

''We are tackling this growing problem from several directions to help keep families in the homes they've worked so hard to achieve,'' said McCollum in a statement.

The lawsuit filed Tuesday in Broward Circuit Court alleges Wyman Roberts and Bernard Williams led a mortgage fraud ring that scammed at least 80 homeowners out of $1.7 million in home equity.

Starting in 2004, Roberts and Williams led a company named National Foreclosure Management in Miami Lakes. Then, Williams led American Home Rescue in north Miami-Dade County, which operated until last year.

Consumer advocates say the fraud -- also called ''equity stripping'' -- is running rampant in Florida. Various kinds of home loan fraud has prompted a host of initiatives, at the county, state and federal levels.

McCollum's lawsuit against National Foreclosure Management and American Home Rescue may come too late for homeowners already caught up in the scheme, said a Legal Aid attorney representing clients the companies allegedly defrauded. George Castrataro, a lawyer with Legal Aid Service of Broward County, said many victims have already lost their homes and probably can't get them back.

''We wanted the attorney general to move more quickly and aggressively,'' said Castrataro, who said he's prodded the state office to take action for nearly 10 months.

Sandi Copes, Attorney General spokeswoman, responded:

``It is a complicated matter when building a lawsuit of this kind. We have to ensure we have a solid case that will deliver the greatest possible benefit to the most victims involved.''

Pamela Simmons, who lost her three-bedroom Pompano Beach home last year after signing up with NFM in 2005, said her lender has already foreclosed on the house and sold it.

''I am glad they sued them, but I lost my house already,'' said Simmons, who now rents a two-bedroom apartment in Boynton Beach.

Here's how the firms' foreclosure programs allegedly worked:

They approached homeowners who had fallen behind on mortgage payments but had substantial equity in their homes.

The company would offer to take title for a year, refinance the mortgage, offer credit counseling and provide some cash. The homeowner would stay in their residence (while paying rent) with the assurance they would get title back in 12 months.

But the lawsuit says the firms actually sold the homes to a new buyer, in many cases artificially inflating the homes' value to get more money out of the deal. And they tacked on outsized fees and costs that erased much of the equity. The Miami Herald, which wrote about NFM and AHR in August, found one case where a $237,000 sale came with a $66,331.80 ''servicing fee'' -- paid to American Home Rescue.

As a result of such fees, the house is saddled with a much bigger mortgage the resident cannot pay.

And, according to the suit, the two companies often didn't pay the mortgage. So buyers would move to evict the homeowner and sell the home in order to avoid their own foreclosure.

The lawsuit, jointly brought by Florida's Office of Financial Regulation, claims deceptive and unfair trade practices. It seeks to stop the defendants, which include Southeast Capital Mortgage in Hollywood and Barrister Title Services in Plantation, from operating in real estate again. It also aims to freeze defendants' assets and recoup all damages lost by victims.

Neither Williams nor Roberts could be reached for comment.

Fingers pointed at the Federal Reserve

The Fed is singled out by critics as largely responsible for failing to eradicate the root causes of possible recession

Recriminations mounted in Davos yesterday among some of the world’s most powerful and influential economic figures over where the lion’s share of blame should lie for a failure to prevent much earlier the build-up of financial stresses that now threaten a severe world downturn.

The US Federal Reserve, as well as the International Monetary Fund, were singled out by expert critics as likely culprits responsible for failing to eradicate the root causes of the mounting global financial crisis and economic dangers.

The Fed in particular came under withering hostile fire from heavyweight former policy-makers who charged the US central bank with fostering a series of destabilising “bubbles” in markets for assets from shares to US housing by tolerating financial excess and running a lax interest rate policy.

Critics said that the Fed should not have permitted runaway gains in shares, and then US house prices, that by reaching excessive levels had encouraged American consumers to borrow and spend irresponsibly.

The Fed ought to have taken pre-emptive action to quell runaway asset price booms, the critics said. It should also have spotted and stopped unsustainable “sub-prime” lending to US households with scant financial worth, they added.

Sir Howard Davies, director of the London School of Economics and former chairman of the Financial Services Authority, said that the Fed now reminded him of Corporal Jones in Dad’s Army, shouting “don’t panic”.

Professor Larry Summers, the former US Treasury Secretary in the Clinton Administration attacked the recent record of the Fed and other central banks.

“It is hard to give central banks a high grade over the past two years on recognition of incipient bubbles, or on their action to address them in either a regulatory or a policy sphere,” he said.

“And it is hard to give them a high grade in the last six months hen the bubbles have been bursting - when they have been consistently behind the curve.”

John Studzinski, a senior executive at Blackstone’s the leading private equity group, was among leading business figures to call for stronger leadership for governments and financial authorities.

“The thing that markets are desperate for right now is leadership, whether globally or regionally, and it seems this is lacking,” he said.

“Until the markets see a lot more leadership on a proactive basis rather than a reactive basis you are going to continue to see this great anxiety and feel this frustration. The Fed is perhaps showing apprehension.”

Stephen Roach, a star economist from Morgan Stanley, accused the Fed of again caving in to Wall Street and market pressure with this week’s emergency US interest rate cut, and risking sowing the seeds of a future with the potential creation of a new financial bubble.

“We've got prima facie evidence that we have a central bank that is being goaded into action just by what the markets are doing,” he said. "It's time to put an end to this, what I think is a very reckless way of running American monetary policy. I'm quite astonished that they did what they did yesterday.”

Lord Levene , Chairman of Lloyds, the insurance market said the lessons had still not learned from the fall of Barings Bank, which collapsed in 1995.

He said: “When Barings went bust, you had these new and highly complex financial products … but the board had inadequate understanding. Financial innovation is only a good thing if the products that come out of it are very transparent and very easily understood.”

Lord Levene said that Governments had shown themselves poorly prepared for crises compared to the insurance industry. “If we ran our businesses like that, if I said, ‘Wait a minute, there's a hurricane happening, we have got to give it some thought', we would not stay in business very long. “

Other expert delegates also laid into the IMF for failing to identify and more clearly warn of the dangers from US sub-prime lending, securitisation of debt through complex instruments, and widespread financial excess.

Professor Summers said: “We have got a bunch of people with substantial role as a ‘sheriff’ [for financial markets] but for a whole variety of reasons they have been averting their gaze.”

Fred Bergsten, director of the influential Peterson Institute for International Economics, said: “The IMF has been asleep at the switch.” He called for a new “steering committee of the major economic powers” of the US, Europe and China - a ‘G3’ .”

George Soros, the billionaire financier said that the present crisis marked the end of an era of US excess built on the foundation of the dollar’s status as a global reserve currency. He also said the IMF had neglected it duty to police global economies and financial markets.

Foreclosures Prompt Cities to Demand Aid from Fed

WASHINGTON — Facing a collapse in the subprime mortgage market that has pockmarked their cities with vacant houses and crippled their budgets, the nation’s mayors pleaded Wednesday for a huge infusion of federal aid.

As more than 250 mayors gathered in Washington for the winter meeting of the United States Conference of Mayors, many agreed that the collapse of the subprime market had left a growing problem of vacant houses, depressed property values, tighter credit, and a need to cut services to close municipal budget gaps.

“It’s an economic tsunami that is hitting our cities,” said Mayor Douglas H. Palmer of Trenton, the president of the conference. “We need federal action not six months from now, but within the next 30 days.”

The conference called on Congress to raise the limits on loans bought by Fannie Mae and Freddie Mac to stimulate the mortgage market, and increase Community Development Block Grants to help stabilize neighborhoods.

In December, the conference released a study that said that home values would drop by $1.2 trillion in 2008, hitting city budgets the hardest. States are also beginning to suffer; on Wednesday, the Center for Budget and Policy Priorities in Washington reported that at least 16 states had predicted budget shortfalls for 2009 totaling over $30.1 billion.

“We’re the ones left boarding up these places, cutting their grass, doing demolition on the abandoned structures, picking up the trash, making sure no one breaks in,” said Mayor Frank Jackson of Cleveland.

Cuyahoga County, Ohio, which includes Cleveland, has more than 16,800 homes that have been abandoned because of foreclosures.

“Anything from the federal government short of a massive infusion of resources into urban centers to rebuild infrastructure and pay for services is too little, too late,” Mr. Jackson said.

Speaking to the group, Robert E. Rubin, a former Treasury secretary, urged the mayors to be more aggressive in pressuring Washington for strong federal action, particularly in reviving the housing market.

Mr. Rubin said the government needed to provide more aid to homeowners struggling with mortgage payments.

The subprime mortgage problem has left many cities scrambling to cut services to try to close budget gaps.

City officials in Sacramento have responded to a $55 million projected budget shortfall for next year city by ordering an immediate hiring freeze and an end to some discretionary spending.

In Virginia, Fairfax County is facing a $220 million deficit for the coming fiscal year and is considering cuts to school districts.

This month, Baltimore’s mayor and City Council announced plans to sue Wells Fargo Bank, contending that the bank’s lending practices discriminated against black borrowers and led to a wave of foreclosures that has reduced city tax revenues and increased its costs.

Cleveland has sought monetary damages from 21 lenders.

“By driving down the value of nearby homes, foreclosures also drive down city revenues and place additional financial burdens on the city and its residents,” said Mayor Sheila Dixon of Baltimore. “It is our responsibility to do what we can to stop it.”

Mr. Palmer said the conference had not taken an official stance on the issue of cities suing lenders. He said that Trenton had had a 14 percent increase in foreclosures in the past year but that suing did not seem prudent because litigation would take at least two years.

He said cities should require lenders to pick up the cost of upkeep for abandoned properties after foreclosures occur.

Greed is to Blame for Sub-Prime Crisis

Everyone wants to know who is to blame for the losses paining Wall Street and homeowners.

The answer, it seems, is someone else.

A wave of lawsuits is beginning to wash over the troubled mortgage market and the rest of the financial world. Homeowners are suing mortgage lenders. Mortgage lenders are suing Wall Street banks. Wall Street banks are suing loan specialists. And investors are suing everyone.

The legal and regulatory wrangles could dwarf the ones that followed the technology stock bust and the Enron and WorldCom debacles. But the size and complexity of the modern mortgage market will make untangling the latest mess even trickier. Some cases stretch across continents. Others are likely to involve state and federal regulators.

“It will be a multiring circus,” said Joseph A. Grundfest, a professor of law and business and co-director of the Rock Center for Corporate Governance at Stanford. “This particular species of litigation will be manifest in many different types of lawsuits in many different jurisdictions.”

The legal battles stretch from Main Street to Wall Street and beyond. Homeowners and subprime mortgage lenders are squaring off in scores of cases that claim some lenders engaged in predatory lending practices and other wrongdoing. Cleveland and Baltimore are pursuing cases against Wall Street banks, saying local residents are suffering because the banks fostered the proliferation of high-risk home loans.

Two questions lie at the heart of many of the cases. The first is whether lenders and investment banks alerted borrowers and investors to the risks posed by subprime loans or securities backed by them. The second is how much they were legally obliged to disclose. “Those are the two issues that are frequently raised,” said Jayant W. Tambe, a partner at the law firm Jones Day.

As defaults and foreclosures rise, the various players in the housing market are all pointing fingers at each other. State prosecutors like Andrew M. Cuomo, the attorney general of New York, are investigating whether investment banks that packaged mortgages into securities disclosed the risks to investors and credit ratings agencies. Investment banks, in turn, are accusing lenders and mortgage brokers of shoddy business practices.

“What strikes me here is that this a tainted system from A to Z,” said Tamar Frankel, a law professor at Boston University. “Everybody blames everybody else. If you look at what is being said, there isn’t one who doesn’t blame another and there is half-truth in everything.”

Wall Street banks that sold mortgage investments around the world face legal complaints from as far away as Australia and Norway. Lehman Brothers, the Wall Street bank with the biggest mortgage business, is being sued by towns in Australia that say a division of the firm improperly sold them risky mortgage-linked investments. Lehman has denied the charges and has said the unit, formerly known as Grange Securities, acted properly.

Closer to home, members of a New Jersey family have sued Lehman for $4.14 billion, saying the firm steered them into complex securities that have become difficult to sell, Bloomberg News reported Friday. Lehman denied the accusations.

In the United States, Lehman is suing at least six mortgage lenders and brokers like Fremont Investment and Loan and the Fieldstone Investment Corporation, claiming they sold Lehman dubious loans. Lehman claims that borrowers’ incomes were overstated, appraisals were inflated and the homes were in poor condition. In most cases, the lenders are fighting the allegations and Lehman’s demand that they buy back defaulted or otherwise problematic loans.

In another case, the PMI Group, a mortgage insurer, sued WMC Mortgage, a subprime lender that has stopped making loans, and its corporate parent, General Electric, in California Superior Court. PMI is trying to force the companies to buy back or replace loans that the firm was hired to insure and that it says were made fraudulently or in violation of the standards that the lender said it was using.

According to the lawsuit, a review of loans found “a systemic failure by WMC to apply sound underwriting standards and practices.” Reviewing a sample of the nearly 5,000 loans in the pool, Clayton, a consultant that reviews mortgage loans, identified 120 “defective” loans for which borrowers’ incomes and employment were incorrect or where the borrower’s intention to live in the home was incorrect. WMC offered to buy back 14 loans, according to the lawsuit.

Some of the loans have defaulted, and a trustee’s report on the pool of loans packaged and underwritten by UBS, the Swiss investment bank, shows that losses on some defaulted mortgages are as high as 100 percent. As of November, about 27 percent of the loans in the pool were either delinquent 60 days or more, in foreclosure or had resulted in a repossessed home.

PMI is on the hook for losses on defaulted loans, lost interest and principal payments to investors who own a $29.6 million slice of bonds backed by the mortgages. A senior vice president at PMI, Glenn Corso, said he was unsure how much the company had paid out so far.

A spokesman for G.E., Robert Rendine, declined to comment, citing the pending litigation.

Securities lawyers say cases involving mortgage-backed securities, which were generally sold privately to sophisticated institutional investors, are far more complicated than those involving stocks, which were sold publicly to everyday investors. Class-action lawsuits, a favorite tool of plaintiffs’ attorneys, will be employed less than they were after the plunge in technology stocks a few years ago because mortgage securities tend to vary in composition and disclosure.

“This is going to be much more complicated to prove, and it’s going to be case by case as opposed to class-actions,” said David J. Grais, who is a partner at the Grais & Ellsworth law firm in New York and an author of a recent paper on the legal liabilities of credit ratings firms. “This resembles the S&L crisis in the ’80s much more than it does the tech bubble in the ’90s.”

Class-action filings spiked earlier this decade, jumping to 497 in 2001, from 215 the year before, according to Cornerstone Research, which compiles the figures in cooperation with the Stanford Law School. As those suits were resolved, new filings fell to a low of 118 in 2006. But as of mid-December, filings had jumped to 169, with about 32 of the cases related to the mortgage crisis.

Through the end of 2006, settlements in technology- and telecommunications-related class-action suits brought by shareholders totaled $15.4 billion, with more than a third of that coming from one company, WorldCom, according to Cornerstone. Settlements in Enron-related cases have totaled about $7.2 billion so far; the figure does not include Securities and Exchange Commission fines and settlements.

Bringing securities fraud cases has been made harder by recent Supreme Court decisions that favored Wall Street, companies and professionals like accountants. The court ruled earlier this month that two technology vendors could not be held liable for taking part in a scheme designed by a cable company to inflate its revenue. Last summer, in a ruling favoring the company, Tellabs, the court said that securities cases could be dismissed if investors did not show “cogent and compelling” evidence of intent to defraud.

Some plaintiffs are using other legal avenues like the pension law, the Employment Retirement Income Security Act. Under that law, managers who handle pension funds must act in the fiduciary interest of their clients. State Street Global Advisors, which manages pension money, has set aside $618 million to settle claims that the firm invested in risky mortgage-related securities.

Some legal experts say that the recent Supreme Court decisions, which are largely based on cases bought by shareholders, may not have much bearing on the more complex cases that stem from securitization of mortgages.

“There will be a whole new set of claims that deal with the unique nature of the securitization market,” Mr. Tambe of Jones Day said. “There will have to be new decisions that deal with those claims and a learning process for the bar and judiciary in those cases.”

Foreclosures affecting pets as well

Humans aren't the only victims of the subprime mortgage crisis -- some animals in the Chicago area lose their families as their owners lose their homes.

"We're seeing quite a few animals being surrendered due to economic reasons, including foreclosure," Angie Wood, assistant executive director of the Naperville Area Humane Society, told the Chicago Tribune.

"We're seeing people in bad financial situations who are moving to places where they can't have pets," she said. "There definitely has been an increase in the past six months to a year."

Some shelters don't report seeing a jump in animals left at their doors. Others, however, said they have seen a spike.

As foreclosures have increased, the Humane Society of the United States issued a public statement saying it's worried about pets affected by the situation, the Tribune reported.

"This isn't the first time we've seen people abandoning their pets. It's a problem throughout the year, when people move and can't take their pets," said Stephanie Shain, director of outreach for the national group in Washington. "But with this increase in foreclosures, we're going to see more of it."

Mexican Housing Booms Despite US Crisis

MEXICO CITY (AP) -- In her bustling corner real estate brokerage, Ana Laura Pulido is doing her best business in years, enjoying a sort of Mexican immunity from the U.S. housing crash.

''It's a time of hope,'' said Pulido, who has sold hundreds of homes to middle-income families since 1992. ''The buyer today is more aware. People buy with more ease, they can plan long-term.''

Long thrashed by swings in the U.S. economy, Mexico now boasts a thriving housing sector whose record growth leads Latin America -- a sign of increased economic stability and an outlet for investors looking to escape the U.S. downturn.

Giants including the California Public Employees Retirement System, the largest U.S. public pension fund, are already bankrolling projects in Mexico, where they see ''more bang for the buck,'' said Clark McKinley, spokesman for CalPERS, which has invested more than $300 million in Mexican real estate funds.

The trend could even slow emigration from Mexico, by generating millions in jobs and personal savings as a fresh supply of loans gives many their first chance to own a house.

President Felipe Calderon has set a national goal of a million new mortgages a year by 2010. On Monday, he unveils a set of measures to ensure growth continues, with plans to boost Mexico's small resale market and combat the urban sprawl that has begun to carpet valleys with hundreds of thousands of matchbox rowhomes.

Behind the boom are six years of economic growth and stability, and a national shortage of 6 million dwellings. While interest rates are falling, just 6 percent of Mexico's 25.7 million homes are financed with mortgages -- compared to about 67 percent in the U.S. Most Mexicans still inherit their homes, buy them with cash, or build them by hand.

That pent-up mortgage demand in a nation of 108 million means lenders can be choosy, enforcing strict standards that held delinquency rates below 4 percent in third quarter-2007, compared to 5.6 percent in the U.S.

''Mexico is in the early stages of expansion,'' said Juan P. De Mollein, managing director for Latin American structured finance at Standard & Poor's. ''There are still plenty of points for evolution because there's still plenty of demand.''

In the U.S., lenders looking to expand their portfolios granted risky mortgages to borrowers with weak credit, but in Mexico, that ''subprime'' category doesn't exist, because lenders don't need it to grow. Also, few Mexicans flip homes or refinance mortgages, keeping the market more stable.

''Mexico doesn't have a credit issue. We can still choose our borrowers because demand is so great,'' said Mark Zaltzman, chief financial officer at Su Casita, one of Mexico's largest mortgage lenders.

A recession north of the border could choke U.S. investment in Mexico, curbing job creation, discouraging new homebuyers and stalling housing growth.

But that won't likely lead to mass layoffs and defaults, said Rafael Amiel, managing director for Latin America at the financial consultancy Global Insight. Mexico simply has too much room to grow, and expanding local markets have insulated it somewhat from U.S. downturns.

Housing demand could swell more as migrants are pushed home by the souring U.S. economy and crackdown on illegal immigration -- generating four new jobs for every home raised, said Carlos Gutierrez, Mexico's housing policy director.

All this represents a major change from 1994, when Mexico devalued the peso, sending inflation and interest rates soaring, forcing homeowners into default and pushing banks to the brink of collapse. Credit was so tight that most Mexicans paid cash upfront or constructed their own homes, often adding one room at a time.

Since then, Mexico has seen a housing recovery built on a mix of government initiatives, private investment and a winning gamble by a new group of entrepreneurs who took a local approach to mortgage lending, using knowledge of family and neighborhood connections to make sure loans got paid.

Rather than build public housing, the government restructured mortgage-lending laws, setting stricter credit guidelines, standardizing appraisals and urging lenders to raise cash on financial markets. It also overhauled Infonavit, a public agency that grants more than half Mexico's mortgages, funded by a 5 percent payroll tax. Some 20,000 jobs were outsourced as the agency more than doubled new loans to 458,700 in 2007, director Victor Borras said.

And when commercial banks ran for the border, a new kind of lender stepped in, known as ''sofoles,'' for the Spanish acronym for ''limited financial association.''

Taking advantage of Mexico's tight family ties and government credits, these nonbank mortgage lenders set up neighborhood offices, requiring relatives to co-sign loans and collecting late payments door-to-door, proving profits could be made.

Banks have since returned, and blossoming competition drove average 15-year mortgage rates to 12.5 percent in November -- a deal in Mexico, where rates topped 65 percent in 1995. Construction is booming too, as just 30 percent of new homes were self-built by their owners last year, down from 50 percent in 2004, Gutierrez said.

While big banks target higher-income borrowers, sofoles are pioneering mortgages for street vendors and taxi drivers, who work in the huge informal economy without documented salary or credit histories. Sofoles study spending habits to establish their income, offering trial payment periods to prove borrowers can afford payments on entry-level homes that range from $17,000 to $37,000.

Another huge potential market is the estimated 11 million Mexicans in the U.S., who can now buy ''cross-border'' mortgages to pay off homes in Mexico, increasing their control over the earnings they send relatives and cutting the time they need to work in the U.S. to build a future back home.

Even as home lending soars, overall debt remains low, making a Mexican credit bubble unlikely. Major mortgage insurers, including U.S.-based AIG United Guaranty and Genworth Financial, now back Mexican loans, slashing risk and making it easier for lenders to bundle and sell debt to investors as mortgage-backed securities -- raising capital to grant yet more loans.

Nearly $5.8 billion of these securities have been sold since 2003, offering investors an alternative to tumbling U.S. markets and giving Mexico's nascent pension funds, which have relied on lower-yielding government bonds, a place to store assets long-term.

Mexico's housing sector is still full of risks, including land ownership disputes, infrastructure delays and limited access to water. The emphasis on private building has concentrated developments in wealthier states, while masses of poorer people still live on dirt floors.

Even so, millions of first-time homebuyers now have an asset to leave their children, or to use as collateral to finance future spending, fueling growth.

''I always had in my head that the only thing you can give your kids as inheritance is an education and a house,'' said Antonia Correa. The 37-year-old receptionist paid $7,200 down on a three-bedroom stucco townhouse in a sprawling new development in Cuautitlan, outside Mexico City.

''You could be short on things,'' she said. ''But a roof is the best. It's your world, your home.''

Agencies gear up to save people's homes

Local nonprofits and government agencies are organizing efforts to deal with the wave of foreclosures sweeping over South Florida, in an effort to keep borrowers in their homes.

Hers is a typical foreclosure story: Eddie Walton, a 44-year-old mother of four, fell ill earlier this year and had to leave her job as a Publix cake decorator. She immediately fell behind the climbing payments on her adjustable-rate mortgage, and, soon after, was in foreclosure.

Then a counselor at the Broward County Housing Authority helped Walton get a grant to pay up the past-due amount and arrange for her lender to change the loan to one she could afford.

Amid South Florida's alarming rise in foreclosures, the new mission of local agencies and nonprofits like the Broward housing agency has suddenly turned from providing affordable housing and down payment assistance to helping prevent homelessness among desperate borrowers facing foreclosure.

Groups are fanning out across the area to inform consumers about ways to avoid losing their homes. The Federal Reserve Bank of Atlanta's Miami branch hosted a meeting with lenders and counselors Thursday to launch a task force in Miami-Dade County to link homeowners with resources.

Help is available from lenders. They are modifying terms of loans and placing borrowers in repayment plans. The problem: walking daunted borrowers through the often complex and time-consuming process.

An industry report released Thursday said lenders had fashioned repayment or loan-modification plans for 19,786 of the 44,150 Florida borrowers whose homes went into foreclosures in the third quarter of last year.

Most of those were repayment plans in which lenders add the delinquent amount to the principal of the loan or spread it out over multiple payments.

That's not generally the most effective form of help, housing counselors and consumer advocates say.

Repayment plans serve as temporary fixes because they don't address the underlying problems of affordability and skyrocketing rates on adjustable loans. Among troublesome subprime adjustable-rate mortgages, which accounted for nearly half of new foreclosures in the quarter ending Sept. 30, the Mortgage Bankers Association said lenders modified 840 loans in Florida and worked out repayment plans for 8,339.

Presumably, Walton was one of them. After her recovery, she was able to find a new job decorating cakes at a Broward Wal-Mart Supercenter, allowing her to qualify for repayment assistance and a loan modification that prevented the loss of her home. Her interest rate, which had risen to 9.75 percent and climbing, was nearly halved to 5 percent -- fixed.

''I won't ever have to worry about it moving again for the next 23 years,'' Walton said. ``I feel wonderful; it's wonderful.''

Finding permanent fixes for borrowers is now the priority of organizations like the Miami-based Neighborhood Housing Services, which only two months ago hired three full-time staffers solely to handle foreclosure clients. The group, principally charged with building affordable housing and providing counseling to first-time buyers, co-hosted Thursday's meeting in Miami with the Federal Reserve Bank.

''We made the conscious choice that we are going to do this, and so we started training people last fall,'' said Arden Shank, who leads the organization -- affiliated with a national organization called NeighborWorks America. ``We have the capacity to do it because we're doing both homeownership counseling and lending. A successful foreclosure intervention specialist is going to be somebody that knows both of those.''

Camillus House, which feeds and houses the homeless and the very poor, has also joined the foreclosure prevention effort owing to the recent influx of calls, some from homeowners facing eviction and seeking shelter. The organization had been authorized to offer mortgage assistance money. But two weeks ago, the Miami-Dade County Homeless Trust, a major funding source, asked it to hold off until counselors could be properly trained.

''We were finding people, after getting assistance, were still losing their homes, so we've kind of stopped it for a little while,'' said Michelle Rodriguez, manager of Camillus House's homeless prevention program, ``We didn't have a formula of how much money we could give, so we kind of put a plug in it.''

The Florida Housing Finance Corp. is also negotiating a contract with NeighborWorks, a nonprofit affordable housing group created by Congress, to provide training to organizations across the state.

The state housing authority disbursed more than $161 million to city and county governments last year for down-payment assistance programs and other affordable housing initiatives. Cecka Rose Green, an authority spokeswoman, said those governments were now using some of those funds for foreclosure prevention efforts.

Phyllis Brown, supervisor of housing counseling at BCHA, said throwing money at people is not the solution, and that catching people before they were too far behind is key.

The organization is flooded with 500 foreclosure calls a week and had appointments through March, mostly with borrowers struggling to pay lofty resets, Brown said. While grants -- usually set aside for down payment assistance -- were available, the trick was determining who had a real chance of surviving.

''The money is not the issue,'' Brown said, ``We can't solve all the cases we get. We can't even take on all the calls we have. I'm a supervisor, but I have a caseload.''

Brown and other counselors advise borrowers falling behind to contact their lenders immediately, and save the money they would normally put toward their monthly payment.

As for Walton, she said if she could solve her problem, anyone could.

''You can't just give up and think the problem is going to go away, because while you think it's going away, it's going deeper and deeper,'' Walton said. ``You need to start asking some of these organizations that really are out there helping people.''

Mortgage industry aided 237,000 borrowers

Mortgage companies eased terms on 54,000 loans and worked out new repayment plans on another 183,000 in the third quarter as they ramped up efforts to stave off foreclosures, an industry group said on Thursday.

The numbers compared with the 384,000 foreclosure starts reported by the industry, the Mortgage Bankers Association said. Of those foreclosures, 63 percent were on speculators, or borrowers who did not respond to help or those who failed to make payments after loan terms were already eased.

"The mortgage industry took major steps during the third quarter to help those borrowers who could be helped," said Jay Brinkmann, vice president of research at the MBA.

Loan "modifications" probably expanded in the fourth quarter amid introduction of an alliance of mortgage companies and counselors established to increase contact with troubled borrowers, Brinkmann said. A plan written by industry groups and supported by the U.S. Treasury to freeze interest rates on some adjustable loans was also enacted last quarter.

It was the first time the mortgage group collected the data from its members, who are responding to pressure to stop the dizzying rate of foreclosures that are exacerbating the housing slump and threatening the U.S. economy. By modifying loans, lenders also expect to reduce losses from selling foreclosed real estate in a sour market.

Mitigating investor losses and public calls to help stop house price declines and foreclosures outweighs the possibility that modifications can destroy borrower discipline and reward irresponsible risk-takers, the MBA said in its report.

Adjustable-rate subprime loans that sparked the mortgage crisis accounted for 13,000 of the modifications and 90,000 of the payment plans last quarter, the MBA said.

Borrowers with adjustable subprime loans accounted for 166,000 of the foreclosure actions, it said. Investors were responsible for 18 percent of those properties, while another 21 percent of the borrowers could not be contacted, it said.

DEFAULT RATE STILL HIGH

What's more, 40 percent of the adjustable subprime loan borrowers defaulted even after receiving a loan modification or payment plan, it said. That percentage rose to 60 percent or more in New Mexico, North Dakota and Vermont.

In states leading foreclosure rolls such as California, Nevada, Florida and Ohio, the percentage of failed loan plans was at or below average.

"The issues that surprised me more (were) investment properties and also the number of people that would just not respond," Brinkmann said. "Also, the number of people lenders already worked with and could not make those (new) payments."

The HOPE NOW alliance of credit counselors and mortgage servicing companies should help increase communication with borrowers, he said. But the high level of defaults after loan modifications gives credence to critics who say foreclosure programs may only delay the inevitable.

"The good news in the MBA report is that there are efforts to do something about the foreclosure crisis," John Taylor, chief executive officer of the National Community Reinvestment Coalition, said in an e-mailed statement. "The bad news is that they are not working."

The MBA report drew responses from mortgage companies that serviced about 33 million loans, or 62 percent of all loans. It included data from Countrywide Financial Corp (CFC.N: Quote, Profile, Research), which on Wednesday said it helped 81,000 borrowers keep their homes in 2007 by restructuring loans or payment plans.

Americans Pay for Housing Boom's Excess

NEW YORK (AP) -- The bill for America's excessive borrowing during the housing boom has arrived, and more people are having trouble paying it.

JPMorgan Chase & Co. and Wells Fargo & Co., two of the nation's largest banks, on Wednesday joined a growing chorus warning that the subprime mortgage mess is just the start of a sweeping lending crisis. And some fear that consumers falling behind on all kinds of loan payments could tip the economy's scale toward recession.

Strapped consumers are having a tough time making payments on credit cards, home-equity loans, and even for their cars. This has caused three of the top five U.S. commercial banks that have already reported damaging fourth-quarter results to set aside some $12.5 billion to cover future loan losses -- and that number will likely grow as the year wears on.

Problems in the subprime mortgage market are rapidly spilling over into other areas of the economy. No matter what the experts call it -- a recession, slowdown or even the makings of a depression -- it's clear banks are under mounting pressure to be more cautious about lending.

''If consumption growth stagnates, the odds of a recession are incredibly high,'' said Andrew Bernard, director of the Center for International Business at the Tuck School of Business at Dartmouth. ''All the pieces of household financial health are starting to be shakier, especially at the low end.''

He and others are paying close attention to what top U.S. banks say about their customers' payment habits. Many view this as an early indicator about where the overall economy is headed, but there are other signs that are troublesome.

The stock market has had its worst start to the year in three decades, with investors rattled by signs from the Labor Department that unemployment is on the rise and retail sales are on the decline. Further, the Commerce Department reported Wednesday that higher costs for energy and food in 2007 pushed inflation for the year up by the largest amount in 17 years.

There was no sign of a turnaround in the last few months of the year. The Federal Reserve reported that the economy grew at a slower pace in late November and December as credit problems intensified and consumers tightened their spending.

To some, it appears that the Fed came to its rate-cutting decision in August a bit too late. Others point to the falling dollar and surging oil prices, factors that usually prevent the central bank from easing its monetary policy.

While debate persists about the Fed's timing and the extent of the slowdown, bank executives -- who have scrambled to prepare for another tumble in home prices and higher unemployment in 2008, feel academic definitions are beside the point.

''We're not predicting a recession -- it's not our job -- but we're prepared,'' JPMorgan Chase CEO Jamie Dimon told analysts after the nation's third-largest bank wrote down $1.3 billion and said profit dropped 34 percent.

His financial institution didn't do all that bad. Rival Citigroup Inc. fared the worst during the fourth quarter, losing $9.83 billion after writing down the value of its portfolio of mortgage and mortgage-backed products by $18.1 billion.

Wells Fargo, a more traditional bank that avoided last year's trading woes, saw its profit fall 38 percent due to troubles with home equity loan and mortgage defaults.

JPMorgan is girding for home prices to decline further in 2008 by 5 percent to 10 percent; Citigroup's estimate of 7 percent falls within that range, too.

''The banks are the infrastructure for everything, the heartbeat of the market,'' said Chris Johnson, president of Johnson Research Group. ''They need to be fixed before the market, and economy, can move forward with confidence. They need to get all their dirty laundry out there.''

Banks and card companies like American Express Co. -- which warned last week that it would add $440 million to loan loss provisions -- said in the regions where home prices are declining, card default rates are rising faster. The same goes for auto loans, subprime mortgages and home equity loans in these areas, which include Florida, Michigan and California.

A big reason for the rise in credit card default rates is that they are returning to more usual levels following a change in bankruptcy law that sent rates lower for a time. But the fact that more losses are being seen in the weaker parts of the country shows the increase is economically driven as well.

Analysts believe this means one thing: Consumers will be the ones paying for years of lax lending standards by U.S. financial institutions. Many will become more restrictive about who gets credit in a bid to stem future losses -- and that could curb consumer spending, which accounts for more than two-thirds of the economy.

''We've pushed the envelope,'' Johnson said. ''Along with the joy of a market that goes as high as ours is the agony of when it starts to correct itself.''

Panel asks Mozilo to testify

WASHINGTON -- Current and former chief executives of three major U.S. financial institutions hit by sub-prime mortgage fallout were asked Monday by a congressional committee to testify at a hearing next month on their pay and severance packages.

A House panel invited Countrywide Financial Corp. CEO Angelo Mozilo, former Citigroup Inc. chief Charles Prince and Stanley O'Neal, former head of Merrill Lynch & Co., to appear Feb. 7.

Mozilo, one of the country's highest-paid CEOs, stands to reap $115 million in severance-related pay after Calabasas-based Countrywide, the nation's largest mortgage lender, is acquired by Bank of America Corp., regulatory filings show.

In a letter, Rep. Henry A. Waxman (D-Beverly Hills), chairman of the House Oversight and Government Reform Committee, asked Mozilo to be prepared to explain how his compensation aligned with shareholders' interests and whether it was "justified in light of your company's recent performance and its role in the national mortgage crisis."

Prince quit Citigroup in the wake of billions in mortgage-related losses and O'Neal was ousted from Merrill under similar circumstances. Both stood to collect millions after leaving.

Baltimore Finds Subprime Crisis Snags Women

BALTIMORE — At Vixxen Hair Salon, the main topic of conversation has always been money. But since last August, Anjanette Booker, the owner, has noticed a new focus. “Now it’s money and foreclosures,” Miss Booker said.

The Vixxen salon, along with the nearby salon Hair Vysions, is one of the informal social centers for the Belair-Edison neighborhood, a community of brick row houses that have in recent years been bought largely by single black women with children.

For each of the last four years, more than half of the foreclosures in this neighborhood have been homes owned primarily by women, according to an analysis of public records by the Reinvestment Fund, a nonprofit community development organization.

The foreclosures threaten the neighborhood’s fragile stability. And they highlight a broader dimension of the housing meltdown: subprime mortgages, which are driving the foreclosure rate, have gone disproportionately to women.

Single women have been among the fastest-growing groups of homeowners in recent years, and in Baltimore they accounted for 40 percent of home sales in 2006, twice the national average, according to the National Association of Realtors. Nearly half of these mortgages were subprime, National Community Reinvestment Coalition found.

“When I bought my house, it was the American Dream,” said Kue McIntyre, 33, a single mother of three who is scrambling to avoid losing her row house, on which she defaulted after losing her job. “Now I need to save it for my boys. If it was just me, O.K., I’d have to give up my first home. But it’s different when you have it for the kids. When they turn 18, I want this to be theirs.”

Subprime mortgages are high-cost loans, at least three points above the prime rate, made to borrowers with low income or credit scores. The loans make up just 13 percent of existing home loans but account for 55 percent of foreclosure starts, the Mortgage Bankers Association says.

Though women and men have roughly the same credit scores, the Consumer Federation of America found that women were 32 percent more likely to receive subprime loans than men. The disparity existed within every income and ethnic group. Blacks and Latinos are also more likely to get subprime loans than comparable white borrowers.

In another study, the National Community Reinvestment Coalition found that women received 37 percent of high-cost home loans in 2005, compared with just 28 percent of prime loans. Preliminary research by the organization suggests that this gap may have tightened as subprime loans crested in 2006.

The findings support earlier research by the Consumers Union, which attributed some of the disparity to instability in women’s credit status because of divorce or family medical emergency. Women also have less wealth than men, which increases the likelihood that they will get subprime loans.

Increased homeownership has been the principal means for women to close this wealth gap. But the disproportion of subprime loans, advocates said, makes it harder for women at all income levels to build wealth by paying off their mortgages.

“The striking thing is that the disparity between men and women actually goes up as income rises,” said Allen J. Fishbein, director of credit and housing policy for the Consumer Federation of America. Among high earners — defined as people earning twice the median income — black women are as much as five times more likely to receive subprime mortgages than white men.

Though no statistics exist to compare foreclosure rates among men and women, Mr. Fishbein said it was logical to conclude that higher rates of subprime mortgages among women translated to higher rates of foreclosure. The Center for Responsible Lending has estimated that one in five recent subprime home loans will end in foreclosure.

In Belair-Edison, these trends converge at Vixxen Hair Salon, where on a recent afternoon the chairs were empty, as they have often been since summer, when many adjustable-rate mortgages in the neighborhood reset — and many women began cutting back on beauty care to pay for them.

“Just our conversations, our demeanor, have changed,” said Miss Booker, who, like most of her customers, is a single woman trying to save her home from foreclosure. “Now when we have the TV on, and something comes on about interest rates, we’ll be screaming at the TV.”

Four years ago, Miss Booker bought a brick row house for $130,000, taking a subprime mortgage because she had a low credit score. Her initial payments were $841 a month.

“He said the rate was adjustable but in six months you can refinance,” she said. “But I never did. I didn’t ask why I didn’t get a fixed rate from the beginning.”

After two years, her mortgage payments shot up to $1,769. She has borrowed money from her former husband and two friends, but says it is hard to ask for money “because most people are going through what you’re going through.”

From her house she said she could see five homes with “For Sale” signs out front, signs that went up around the time many mortgages reset. “It looks like a ghost town,” she said of the streets around her house.

The Belair-Edison neighborhood, which borders some of Baltimore’s poorer areas, has been periodically held up as a success story in a city trying to recover from the loss of its manufacturing base and a third of its population. “It’s a buffer between rough Baltimore and the outer ring,” said Mark Sissman, president of Healthy Neighborhoods Inc., a nonprofit group that makes home loans. “If Belair-Edison stays stable, the city is advantaged. If it falls apart, it’s a problem.”

The neighborhood’s 6,400 houses are mostly owner-occupied, and median house prices have nearly doubled since 2004, to $125,000. Partnerships between neighborhood associations and city agencies have brought millions of dollars for community improvement projects.

But the neighborhood’s stability is fragile. After a double homicide in September outside a Sunday church service, one community leader said the recent spikes in crime were a result of instability in the housing market, with outside investors scooping up foreclosed properties and renting them to transients.

In 2007 foreclosures were initiated on 181 houses in the neighborhood, or one in 35, according to research by the Community Law Center. This represents a slight drop from 211 initial filings in 2006, even as foreclosures rose elsewhere in the city and state.

Roy A. Miller, who provides homeownership counseling — including foreclosure counseling — for the nonprofit Belair-Edison Neighborhood Initiative, described his typical client as “single, female, with two children, in her first house.”

Freddie Mac and Fannie Mae, which buy loans from mortgage lenders, have estimated that 15 percent to 50 percent of the subprime loans they bought in 2005 went to borrowers whose credit scores indicated they were qualified for prime loans.

Lisa R. Evans, deputy director of St. Ambrose Housing Aid Center Inc., a nonprofit organization whose services include foreclosure counseling, said 2,100 families were counseled in the 2007 fiscal year, up from 700 the year before. Two-thirds of the families had a female head of household, Ms. Evans said, and about 90 percent had subprime mortgages.

“Prime lenders don’t advertise in communities like Belair-Edison, and they don’t have offices there,” Ms. Evans said. “So people go to somebody that advertises on the radio or sent them a mailing. Subprime lenders were very good at this. They went after an untapped market.”

This month, Baltimore’s mayor and its City Council announced that they were suing Wells Fargo Bank, saying the bank had singled out minority neighborhoods for high-priced subprime loans; the bank denied the accusation.

These marketing efforts may not be intended specifically for women, Ms. Evans said, but in the target neighborhoods, “that’s who gets the houses, and that’s who goes into default.”

“It’s not that women go into default faster,” she said.

Mr. Fishbein said that even at high-income levels, mortgage brokers may assume that women are less confident to negotiate or shop around, and so offer them higher rates. A survey in 2006 by Prudential Financial found that two-thirds of women graded themselves at C or lower in their knowledge of financial services or products.

Ms. McIntyre, who bought her house for $125,000 in April 2006, is one of those women. When she bought the house, using two subprime loans — adjustable loans that started at 8.35 percent and 13.25 percent — the lender insisted that she use her savings to pay down a car loan, a common demand on subprime loans. After she lost her job, she had no reserve to pay her mortgage.

“I feel they had me from the start,” Ms. McIntyre said. “I was eligible for money as a first-time home buyer and a state employee. Nobody told me about any of these.”

Her house was offered at foreclosure auction in December, without a buyer. She is still living in it, hoping to work out a payment plan with her lender.

“And if I can’t keep my house, I need to save my money so I’ll be ready to buy another house in two years,” she said. “But it’s really hard to get out of this hole.”

Mayors face test of spreading foreclosures

TRENTON, New Jersey (Reuters) - Mayor Douglas Palmer, meeting with visitors at City Hall, points to a large map peppered with dark dots. Each one represents a home or group of homes on the verge of foreclosure, and there are dozens all over the city.

The dots represent only those properties that the sheriff's department of surrounding Mercer County has identified as being at risk. Many more they don't even know about, Palmer said. "Some people are even afraid to talk about it," he said of homeowners facing skyrocketing mortgage payments. "Half of them don't even call their lender when they run into problems, so they try to fly under the radar screen, which is the worst thing you can do."

The challenge, said Palmer, is to prevent more homes from ending up as specks on the map, but the resources at his disposal are limited.

The site of a pivotal battle in the Revolutionary War, this port city more recently has struggled with drugs, violent crime, joblessness and other urban woes.

The latest crisis threatens to derail years of revitalization under Palmer, a four-term incumbent and the first black mayor in a predominantly black city of 85,000 people.

Like many U.S. cities, it has seen foreclosures surge as people who bought homes in a real estate frenzy in the last few years face mortgage payments that have reset to higher rates they cannot afford.

More than 600 properties went into foreclosure or came under threat of imminent foreclosure last year, up from 421 in 2006, according to the mayor's office, collating data from a number of sources. Those numbers are set to grow this year. As of December, the sheriff's office had identified 260 properties in danger.

ANEMIC RESPONSE

It is not just Trenton that Palmer is concerned about. Foreclosure has become a top priority for the U.S. Conference of Mayors, of which he is president and which is holding its winter meeting in Washington Jan. 23-25.

Palmer and other mayors say a mortgage relief plan brokered by President George W. Bush's administration does not help the many people who are already well into the process of losing their homes. "The federal government response has been anemic," said Mayor John DeStefano of New Haven, Connecticut, where foreclosures rose 80 percent in 2007. "Mayors are talking to each other about this," DeStefano said. "No one else is going to help these homeowners."

Thomas Cochran, executive director of the mayors' group said foreclosures could become a defining issue for urban leaders, like the AIDS epidemic in the 1980s, which cities were forced to tackle early on when they saw insufficient federal response.

In Trenton, Palmer has focused for years on creating affordable housing for middle-income people, including a collection of attractive row houses in a once-downtrodden area known as the Battle Monument district.

This was the site of the Battle of Trenton, in which the Continental Army under Gen. George Washington won victory after crossing the Delaware River on Christmas night in 1776.

The mayor fears that even neighborhoods like this one, where mortgages are mostly strong, will suffer as foreclosures rise, homes are shuttered, crime festers and property values fall. Police have reported a rise in copper pipe thefts around the city, for example, as vandals strip unoccupied homes, Palmer said. "This cuts across every area of our economy, of the services we'll have to provide," Palmer said. When homes are boarded up, neighbors complain of blight such as piles of trash and overgrown grass, he said. "Who's going to cut it? The city will have to."

LAWSUITS

As mayors confront the problem, some are aiming squarely at mortgage companies. The city of Baltimore has sued Wells Fargo & Co , accusing the lender of preying on minorities in its lending practices. The company denies the allegations.

Elsewhere, cities such as Cleveland and Buffalo, New York, are trying to hold lenders responsible for the maintenance of homes in foreclosure. Cleveland has sued companies including Wells Fargo and Merrill Lynch & Co Inc seeking to recover hundreds of millions of dollars for lost property tax revenue and the clean-up of abandoned houses. "For some cities, this is going to be a crisis," said John Vogel, a professor at Dartmouth College's Tuck School of Business, who studies real estate. A city such as New York "is doing so well on the commercial side and revenue collection, they will be able to deal with this pretty comfortably, whereas a city like Trenton does not have the same sort of resource base."

Mayor Palmer plans to meet in Trenton on Jan. 14 with representatives of major mortgage lenders and community and faith-based organizations in an effort to help city homeowners on the verge of losing their homes.

He's hopeful there are local solutions that other cities could adopt. One idea is for community development organizations to buy homes in foreclosure and lease them to the former owners while helping them prepare to repurchase them, something already being done on a small scale in his area. "It's going to require a lot of creativity, but the most important thing is the mayors in the country and myself have the will to do this," Palmer said.

Cleveland Sues 21 Lenders Over Subprime Mortgages

CLEVELAND — Cleveland is suing 21 of the nation’s largest banks and financial institutions, accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay.

The city is seeking “at least” hundreds of millions of dollars in damages, Cleveland’s law director, Robert J. Triozzi, said Friday. The list of defendants includes some of the most prominent firms on Wall Street, like Citigroup, Bank of America, Wells Fargo, Merrill Lynch and Countrywide Financial.

Mayor Frank G. Jackson said in an interview on Friday that the companies would be “held accountable for what they’ve done.”

“We’re going after them to get the resources we need to rebuild our city,” Mr. Jackson said.

The financial crisis has hit Cleveland especially hard, with more than 7,000 foreclosures in each of the last two years, Mr. Jackson said. Entire city blocks have been abandoned. The city’s budget has been strained by the effort to maintain thousands of boarded-up homes, and by the cost of responding to a rise in violent crime and arson.

The major banks involved did not return calls about the lawsuit. A spokesman for Merrill Lynch, Mark Herr, said, “We’re declining to comment right now.”

The Cleveland suit is separate from one filed Tuesday in federal court by the City of Baltimore against Wells Fargo, accusing it of violating fair-housing laws by singling out African-Americans for high-interest mortgages.

The Cleveland suit, filed Thursday in Cuyahoga County Common Pleas Court under the state’s public nuisance law, asserts that the financial institutions created nuisances across broad swaths of Cleveland because their loans led to widespread abandonment of homes. “We’ve torn down 1,000 abandoned houses, and haven’t even made a dent,” Mr. Jackson said.

The drop in homeownership, and a steep decline in population — to 444,000 residents in 2007 from almost a million in 1950, according to census figures — has drained Cleveland’s budget. In December, Mr. Jackson announced that the city was unable to borrow money and would be forced to postpone or permanently shelve millions of dollars in public works projects.

“The strain on our budget is too much,” Mr. Jackson said. “These companies have knowingly created a public nuisance by exploiting the city of Cleveland.”

Several Cleveland suburbs have expressed interest in joining the case as a class-action suit, Mr. Triozzi said. Because the city is suing under a state statute, cities outside Ohio could not join. “This case is about what these Wall Street bankers did to Cleveland,” Mr. Triozzi said.

Instead of aiming at the banks that originally made subprime mortgage loans in the city, the lawsuit is against those firms that bundled the loans into securities to be divided into shares and sold on the stock exchange. This process, and the large fees the firms generated from the work, Mr. Triozzi said, drove their effort to make as many loans as possible during an era of low interest rates and a prolonged housing boom.

Inquiry Looks at Withholding of Loan Data

An investigation into the mortgage crisis by New York State prosecutors is now focusing on whether Wall Street banks withheld crucial information about the risks posed by investments linked to subprime loans.

Reports commissioned by the banks raised red flags about high-risk loans known as exceptions, which failed to meet even the lax credit standards of subprime mortgage companies and the Wall Street firms. But the banks did not disclose the details of these reports to credit-rating agencies or investors.

The inquiry, which was opened last summer by New York’s attorney general, Andrew M. Cuomo, centers on how the banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments, according to people with knowledge of the matter. Charges could be filed in coming weeks.

In an interview Thursday, Connecticut’s attorney general, Richard Blumenthal, said his office was conducting a similar review and was cooperating with New York prosecutors. The Securities and Exchange Commission is also investigating.

The inquiries highlight Wall Street’s leading role in igniting the mortgage boom that has imploded with a burst of defaults and foreclosures. The crisis is sending shock waves through the financial world, and several big banks are expected to disclose additional losses on mortgage-related investments when they report earnings next week.

As plunging home prices prompt talk of a recession, state prosecutors have zeroed in on the way investment banks handled exception loans. In recent years, lenders, with Wall Street’s blessing, routinely waived their own credit guidelines, and the exceptions often became the rule.

It is unclear how much of the $1 trillion subprime mortgage market is composed of exception loans. Some industry officials say such loans made up a quarter to a half of the portfolios they saw. In some cases, the loans accounted for as much as 80 percent. While exception loans are more likely to default than ordinary subprime loans, it is difficult to know how many of these loans have soured because banks disclose little information about them, officials say.

Wall Street banks bought many of the exception loans from subprime lenders, mixed them with other mortgages and pooled the resulting debt into securities for sale to investors around the world.

The banks also did not disclose how many exception loans were backing the securities they sold. In prospectuses filed with regulators, underwriters, in boilerplate legal language, typically said the exceptions accounted for a “significant” or “substantial” portion. Under securities laws, banks must disclose all material facts about the securities they underwrite.

“Was there material information that should have been disclosed to investors and/or ratings agencies which was not? That is a legal issue,” said Howard Glaser, a consultant based in Washington who worked for Mr. Cuomo when he was secretary of the Department of Housing and Urban Development in the Clinton administration.

Mr. Blumenthal said the disclosures offered by banks in their securities filings appeared to be “overbroad, useless reminders of risks.”

“They can’t be disregarded as a potential defense,” Mr. Blumenthal said. “But a company that knows in effect that the disclosure is deceptive or misleading can’t be shielded from accountability under many circumstances.”

Under Connecticut law, Mr. Blumenthal could bring only civil charges in his inquiry. In New York The Martin Act in New York gives the attorney general broad powers to bring securities cases, and Mr. Cuomo could bring criminal as well as civil charges.

Mr. Cuomo, who declined to comment through a spokesman, subpoenaed several Wall Street banks last summer, including Lehman Brothers and Deutsche Bank, which are big underwriters of mortgage securities; the three major credit-rating companies: Moody’s Investors Service, Standard & Poor’s and Fitch Ratings; and a number of mortgage consultants, known as due diligence firms, which vetted the loans, among them Clayton Holdings in Connecticut and the Bohan Group, based in San Francisco. Mr. Blumenthal said his office issued up to 30 subpoenas in its investigation, which began in late August.

Officials at Wall Street banks and the American Securitization Forum, which represents industry, declined to comment, as did the due diligence firms. Credit-rating firms would not say if they had been subpoenaed but said that they were generally not provided due diligence reports, even when they asked for them.

The S.E.C. is also examining how Wall Street banks sold complex mortgage investments. The commission has about three dozen active investigations in the area, said Walter G. Ricciardi, the deputy director of enforcement. “We have not yet concluded whether the securities laws were broken,” he said.

Investment banks that buy mortgages require lenders to maintain standards outlining who is eligible for loans and how much they can borrow based on their overall credit history. But as home prices surged, subprime lenders, which market to people with weak credit, relaxed their guidelines. They began lending to people who did not provide documents verifying their income — so-called no-doc loans — and made exceptions for borrowers who fell short of even those standards.

The New Century Financial Corporation, for instance, waived its normal credit rules if home buyers put down large down payments, had substantial savings or demonstrated “pride of ownership.” The once-highflying lender, based in Irvine, Calif., filed for bankruptcy last year.

William J. McKay, who was the chief credit officer at New Century, said the company usually made exceptions so homeowners could borrow more money than they qualified for under its rules. In most cases, the decisions raised borrowers’ credit limits by 15 percent, he said.

New Century measured pride of ownership in part by how well buyers maintained their homes relative to their neighbors, Mr. McKay said, adding that this usually was not enough on its own to qualify a borrower for an exception.

Investment banks often bought the exception loans, sometimes at a discount, and packaged them into securities. Deutsche Bank, for example, underwrote securities backed by $1.5 billion of New Century loans in 2006 that included a “substantial” portion of exceptions, according to the prospectus, which lists “pride of ownership” among the reasons the loans were made.

Nearly 26 percent of the loans backing the pool are now delinquent, in foreclosure or have resulted in a repossessed home; some of the securities backed by the loans have been downgraded.

Mr. McKay defends the lending and diligence practices used in the industry. He said Wall Street banks examined exception loans carefully and sometimes declined to buy them. But they often bought them later among mortgages that New Century sold at a discount, he said.

Some industry officials said weak lending standards, not exceptions, were largely to blame for surging defaults. “The problem is not that those exceptions are going bad — you don’t have a lot of exceptions in the pools,” said Ronald F. Greenspan, a senior managing director at FTI Consulting, which has worked on the bankruptcies of many mortgage lenders. “To me it’s a more fundamental underwriting issue.”

To vet mortgages, Wall Street underwriters hired outside due diligence firms to scrutinize loan documents for exceptions, errors and violations of lending laws. But Jay H. Meadows, the chief executive of Rapid Reporting, a firm based in Fort Worth that verifies borrowers’ incomes for mortgage companies, said lenders and investment banks routinely ignored concerns raised by these consultants.

“Common sense was sacrificed on the altar of materialism,” Mr. Meadows said. “We stopped checking.”

And as mortgage lending boomed, many due diligence firms scaled back their checks at Wall Street’s behest. By 2005 , the firms were evaluating as few as 5 percent of loans in mortgage pools they were buying, down from as much as 30 percent at the start of the decade, according to Kathleen Tillwitz, a senior vice president at DBRS, a credit-rating firm that has not been subpoenaed. These firms charged Wall Street banks about $350 to evaluate a loan, so sampling fewer loans cost less.

Furthermore, it was hard for due diligence firms to investigate no-doc loans and other types of mortgages that lacked standard documentation.

“Years ago, it used to be, ‘Did the due diligence firm think it was a good loan?’ ” Ms. Tillwitz said. “We evolved into the current form, which is, ‘Did I underwrite these loans to my guidelines, which can sometimes be vague and allow exceptions?’ ”

The attorneys general are leaning heavily on due diligence firms to provide information that could prove damaging to their clients, the investment banks.

These firms played such a critical role in the mortgage securities business that New Century set aside up to eight large conference rooms in its offices where due diligence experts reviewed loan files. With billions of dollars worth of loans being traded monthly, these specialists had to keep up with a frenetic pace.

“There was somebody in most of the rooms all the time,” Mr. McKay said.

Federal lawmakers have highlighted due diligence in mortgages as a potential problem. A bill by Representative Barney Frank, Democrat of Massachusetts, that the House passed last year would require federal banking regulators and the Securities and Exchange Commission to create due diligence standards. Another measure introduced by Senator Christopher J. Dodd, Democrat of Connecticut, would subject banks to class-action lawsuits unless diligence was conducted by an independent firm.

In recent months, Moody’s and Fitch have said that they would like to receive third-party due diligence reports and that the information should be provided to investors, too. Glenn T. Costello, who heads the residential mortgage group at Fitch, said his firm would not rate securities that include loans from lenders whose procedures and loan files it was not allowed to review.

Will foreclosures spark an arson boom?

As homeowners get more desperate, the insurance industry is bracing for an increase in arson.

Faced with foreclosure on her Russellville, Indiana home, Christina Snyder allegedly concocted the kind of plan that now has insurance executives on edge.

According to the county prosecutor, the 31-year-old Snyder allegedly offered to pay a neighbor $5,000 to help her burn down her house and make it look like a botched rape attempt - all in order to claim $80,000 in insurance money. Snyder wanted the neighbor to bind her hands in duct tape, write "whore" on her shirt, and then help her escape once the blaze was set, the prosecutor says. The neighbor demurred, instead reporting Snyder to police.

With the national foreclosure rate zooming and the real estate market in a two-year funk, the insurance industry fears more homeowners will see arson as a way out of their financial woes. A recent report by the industry-funded Coalition Against Insurance Fraud notes that with "untold thousands of homeowners struggling with ballooning subprime mortgage payments, fraud fighters are watching closely for a spike in arsons by desperate homeowners who can no longer afford their home payments."

History indicates such a spike is coming. "When the economy is down, we see an increase in fraud," says Dennis Schulkins, a claim consultant in State Farm's Special Investigative Unit.

It may already be happening. Allstate (ALL, Fortune 500) spokesman Mike Siemienas says his company has seen an increase nationally in arsons among homes in foreclosure. In California, the state¹s insurance division reports that the number of questionable residential fires in 2007 increased 76 percent over 2006.

National arson statistics for 2007 aren't yet available, but Federal Bureau of Investigation crime data shows there was a significant uptick - 4 percent - in suburban arson in 2006, when the real estate downturn began to take hold. The arson increase in 2006 marked a change from the prior three years when suburban arson fell 3 percent, 5 percent and 6 percent, respectively. Says Dennis Jay, the Coalition Against Insurance Fraud's executive director, "It's a growing problem."