The Christophersons had a conventional loan when two medical crises hit. They refinanced, but the hole just got deeper.
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.