Empty Nests

The Butchers borrowed $158,400 from NovaStar, a Kansas City company that specializes in making home loans to people with shaky credit. At the time, companies like NovaStar were making a killing selling those kinds of loans — so-called affordability loans that allowed people with little savings, spotty work histories and low credit scores to borrow money. Subprime loans were a $600 billion industry in 2006, up from $120 billion in 2001.

Kansas City had emerged as a nerve center of this industry.

In 2002, nearly half of H&R Block's income came from its subprime mortgage business, Option One. NovaStar traded for $70 a share in March 2004. Now, as foreclosures empty homes across the country, these two Kansas City companies, which once were among the top 20 subprime lenders in the United States, face the consequences of their promiscuous lending.

Simply put, companies such as NovaStar and Option One gave too much money to too many borrowers who lacked the means or sophistication to meet their obligations. Rising home prices kept the charade going for a while — borrowers could refinance their sucker loans before the higher interest rates kicked in. Then the market cooled, and homeowners began to default. The United States recorded 320,000 home foreclosures in the last three months of 2006.

As defaults and delinquencies mounted, Wall Street ran for the hills. One subprime high-flier, the Irvine, California-based New Century, went into bankruptcy after its stock price fell by 90 percent. H&R Block put a for-sale sign on Option One last November and sold the subsidiary at a discount in April.

NovaStar lost $1 billion in market value in the downturn, which NovaStar CEO Scott Hartman delicately termed "a difficult phase."

A tumbling stock price isn't the company's only concern, however. Last month, NovaStar paid millions to resolve the claims of borrowers in Washington state; the month before, a nonprofit in Washington, D.C., filed a federal lawsuit accusing the company of discriminating against minorities and disabled people.

NovaStar has managed to remain solvent in the face of adversity. Some subprime borrowers haven't been so lucky.

Walter Cook mounts a video camera on a miniature tripod and waits for 3 p.m. so he can start the auction.

The afternoon sun bakes the north steps of the Jackson County Courthouse in downtown Kansas City. Cook leans against the building's limestone façade, paperwork under his arm. He is wearing a striped Oxford shirt and black slacks. He is alone except for the handful of county employees taking smoke breaks.

Cook works for Millsap & Singer, a St. Louis law firm that represents banks and mortgage lenders. The Sony Handycam at his feet is poised to document the sale of about a dozen houses whose owners defaulted on their home loans.

Cook auctions a lot of property. On this afternoon, he has already visited the courthouses in Independence and in Cass, Platte and Clay counties. "I just drive all day long," he says.

The first house for sale is located at 75th Street and Main. Cook gives the legal description of the property in a patter more city clerk than barnyard auctioneer.

"Opening bid is $120,069.46. Do I hear any other bids?"

Pause.

"No other bids. Property's going once, twice, three times. Property is sold."

A bank submitted the winning bid in advance. Sometimes live buyers show up. But what Cook does is mostly a formality. It takes him about a minute to sell each piece of property.

The house at 75th and Main had been owned by Adrian and Venetia Delgado. County records indicate that the couple refinanced the house in 2005 with Ameriquest, a subprime lender based in Southern California.

The Delgados borrowed $105,000 on an adjustable-rate mortgage. The interest rate on the Delgados' loan was scheduled to increase in January. The deed on file with the county indicates that the Delgados were looking at a rate hike from 9.65 percent to as much as 11.65 percent, depending on market fluctuations. (The Delgados, who still reside in the house on Main, declined to comment.)

Home loans didn't used to be so exotic. In the not-so-old days, people who wanted to buy houses went to their local banks with a 20 percent down payment in hand.

But over the past decade, as investors searched for new ways to make money, mortgages became available in new flavors. Borrowers could get loans with 40- or 50-year terms and no down payments. Sometimes, they didn't even have to prove how much money they made.

Wall Street loved these newfangled loans. Big firms such as Lehman Brothers and Bear Stearns began buying the mortgages and bundling them into bonds. Investors bought the securities because they paid a nice coupon, supported by the higher interest rates that subprime borrowers had to pay for credit.