Oct. 28: Struggling to escape the subprime swamp

For two hours, friends of Paul and Tracie Christopherson streamed into the Applebee's in St. Anthony. The lure was the all-you-can-eat pancakes, but the purpose of the event was to fill a giant stainless steel bowl with donations.

Seven-year-old Connor Martin, and his brother Owen, 4, dropped in $70 they had made selling lemonade. A stranger who learned of the family's hard-luck story gave nine $20 bills.

For the Christophersons, who were two months behind on house payments, the July breakfast raised $4,465 -- enough money to save their home from foreclosure, at least for the time being. "It was a Band-Aid on a cut that needs stitches," Paul said.

Like millions of homeowners across the country, the Christophersons were stuck in a subprime mortgage. The interest rate was about to soar, hitting them with a new payment that would eat up more than Paul's monthly take-home pay.

Unless the couple could change course, they likely would end up as one of the estimated 2 million American families headed for foreclosure this year. The fallout from all those foreclosures is fanning fears of a recession across the globe.

Some of the world's biggest financial institutions have lost billions of dollars betting on the ability of people like the Christophersons to repay their mortgages. Home prices, which doubled between 1997 and 2006 and helped prop up consumer spending after Sept. 11, are falling for the first time in decades. Home sales in Minnesota have plunged almost 16 percent from a year ago. Bankruptcies nationwide and in Minnesota are up 40 percent so far this year, despite a new federal law that makes it harder and more expensive to file.

"If someone is struggling with cash flow, anything can spin them into debt, especially something like unforeseen medical bills," said Tara McCarthy of Financial Rehabilitation Inc., in Minneapolis. "I see a lot of people in this situation. They struggle to maintain a semblance of the life they knew, but they can't keep up. Before long, their home goes into foreclosure."

While some decry the borrowing binge that Americans have been on for the past six years, it was in part a lending binge, too.

Banks, credit-card firms and mortgage companies made huge profits on easy credit. Last year, for the first time ever, household debt in the United States outstripped income. Coupled with a savings rate that is at Depression-era lows, families have no wiggle room should they hit a bump in the road.

Now, the housing boom that allowed homeowners to refinance and get cash out of their homes as prices rose has ended.

The Christophersons, who had jobs and medical insurance, got into trouble over back-to-back medical crises with two of their children. And now, Paul, 45, and Tracie, 41, face losing the one anchor in their lives -- their home. And like thousands of other middle-class Minnesotans, they are discovering that few options are available.

The American Dream

Back in 2001, Paul and Tracie Christopherson were thrilled with the two-bedroom home in northeast Minneapolis that they bought for $178,000. It was small, about 960 square feet, but they qualified for a conventional mortgage at a good rate from the government-backed Federal Housing Administration. Paul's parents cosigned on the loan.

"I was working full time, Tracie was working almost full time, and we said: 'We can do this!'" Paul said.

Both worked as restaurant servers. They didn't have steady paychecks, but they had a good idea of how much they were earning. It was enough to pay the bills and have a little left over for fun with their two daughters. (Their third child, Kaydee, would be born in November 2002.)

But Matti, then 6 months old, started having stomach problems and losing consciousness. It took five multi-day hospital stays and a string of $260 visits to specialists before doctors diagnosed a disorder known as MCAD deficiency, a cause of sudden-infant death syndrome.

Paul's medical insurance paid only part of the costs. In no time, the family was thousands of dollars in the hole. Although Paul quickly landed a new job with good benefits as a customer-service rep with Ecolab, the spiral had begun.

Matti's condition, while potentially deadly, was manageable with diet and medication. But soon problems with their oldest daughter, Abi, then 4, surfaced.

It started when Abi got bumped in the head with a swinging door. The knock wasn't hard enough to make her cry. But four weeks later, she was dizzy and still had a stiff neck. Three trips to the emergency room led to an $8,000 MRI, which revealed a rare birth defect known as a Chiari Malformation.

The condition makes the back of Abi's brain too big for her skull and causes a dangerous buildup of spinal fluid. Although usually not life threatening, it requires a lifetime of treatment.

"Our whole life changed on that day," Tracie said.

A week after the diagnosis in February 2003, Abi was having brain surgery. She would have 10 more surgeries, the most recent in August. Each one carried a risk of paralysis.

Caring for Abi sank the couple deeper into debt. They borrowed money from family. When the bank offered checks of $1,300 or $5,000 -- the kind consumers are advised to ignore but are oh-so-tempting to those in dire straits -- Paul and Tracie cashed them. They needed to buy groceries and pay bills. Late fees and interest rates of 25 percent and higher eventually caught up with them.

"You just want to keep paddling," Tracie said. "If something comes along that will help you stay in your boat, you're going to grab it whether or not it's smart."

With home values in their neighborhood rising 15 percent a year, the Christophersons refinanced their mortgage in 2004 to get cash to pay off their credit cards. Because unpaid credit card bills and outstanding loans had wrecked their credit rating, the only available course was a subprime mortgage -- one that carried a high interest rate to offset the lender's risk of taking on borrowers with spotty credit records.

The new $1,800 monthly payment ate up 60 percent of Paul's salary, but would stay fixed for four years before adjusting. That provided some predictability, but not much margin for life's inevitable emergencies.

Two years later, they were destitute once again. It didn't matter that Paul got up at 5 a.m. to ride the bus to work. Or that they owned old cars and wore second-hand clothes.

"There would be times where Paul would say, 'The car needs gas,' and I'd say, 'We need milk,'" Tracie said.

A financial counselor told them the only way to save the house was to declare Chapter 7 bankruptcy, which they did in 2006. They owed $34,000 in high-interest loans and credit cards, plus $20,000 in student loans from the University of Minnesota, where Paul had earned a business degree.

Within months, Tracie would quit her 20-hours-a-week job in the school nursery at their church, Nativity Lutheran. Between Abi's doctor's visits, surgeries and hospital stays -- one lasting two months -- Tracie simply couldn't juggle it all.

Not poor enough

Paul's $30,000 salary puts the family of five above the federal poverty guideline of $24,130, making the Christophersons eligible for some government aid programs but not others.

The process of figuring it out has been frustrating and humiliating.

Tracie once spent two hours trying to get emergency cash assistance from Hennepin County, only to be told that she wasn't poor enough. The family received food stamps one month, but was denied the next month when Tracie went back to work.

With Tracie not working, Abi is eligible for about $630 a month in Supplemental Security Income. But that makes the family ineligible for food stamps.

The three girls now also are on medical assistance, which covers 100 percent of co-pays, premiums and hospital stays. They get reduced-price lunches at school, too, for about 40 cents a day. The couple has applied for heating assistance, which last winter contributed $135.

Jim Koppel, director of the Children's Defense Fund Minnesota, which lobbies for kids in poverty, said that complicated forms and basic unfamiliarity with the system cause families like the Christophersons to leave "thousands of dollars ... on the table each year." The health-care application form, for instance, has grown from four pages to 35 in recent years. And families must reapply every six months to a year, depending on the type of program.

Even the mail carrier helped

Despite the hardships, the Christophersons appear to win hearts wherever they go. In the years since Abi's diagnosis, dozens of friends have come to their financial rescue.

Abi, Matti and Kaydee got new school clothes and supplies this year from one of Paul's co-workers, who raised $175 at her church for a gift card.

And that pancake fundraiser? Applebee's waitress Heather Schilling pulled it together when she learned of the couple's plight.

One Christmas, mail carrier Debbie Christianson raised $800 from her colleagues and dressed up as a gift-bearing Santa Claus.

"They're just a wonderful family who depend on each other and their faith," Christianson said. "And they're almost always smiling. Abi, too. She's a tough kid."

Steve Burrill, a paraplegic whose home-health aide was a friend of Tracie's, led the charge to create a website (www.abiangels.com) for donations to pay the mortgage. There's enough now to cover about six house payments, he said.

The Make-A-Wish Foundation of Minnesota transformed the family's basement into an entertainment area. At the center is a pink stage where Abi dreams of hosting an American Idol karaoke party under the disco ball.

"We're so grateful," Paul said. "But we don't want to depend on it. We want to stand on our own."

Just another Band-Aid

Mortgage broker Steve Lange helped the Christophersons buy their home in 2001, guided them through the 2004 refinance, and counseled them through bankruptcy in 2006.

This summer, Lange once again pulled up a chair at the Christophersons' kitchen table to try to save their home from foreclosure.

The good news: their house had increased in value to $265,000, up 6 percent from three years ago. That made it possible for them to refinance. But the bankruptcy and delinquent payments still kept a conventional loan out of reach.

Their only option was another adjustable subprime loan. This one will hold payments steady for another five years, but it comes with a 2 percent prepayment penalty within the first three years. The monthly payment still eats up more than half of Paul's pay.

"All it'll do is prevent things from getting worse," Lange said. "Hopefully, they can keep up with their payments, and I'll be back here in 2 years and 11 months we can get them into an FHA loan."

Meanwhile, Paul and Tracie just sank $750 into their 1995 Dodge Shadow for repairs.

Four-year-old Kaydee is recovering from having her tonsils removed.

And before year's end, 9-year-old Abi likely will have her 12th surgery.

Jackie Crosby • 612-673-7335

Jackie Crosby • jcrosby@startribune.com