ESOp's Barbara Anderson - A binder documents a neighborhood's fight.

Five years ago, Barbara Anderson didn't know what predatory lending was. As her elderly neighbors vanished from Slavic Village one by one, she chalked it up to hard luck.

But in time the pattern became impossible to miss. Homes were abandoned and boarded up with too much speed and frequency. Few were ever reoccupied, unless you counted the drug-boy squatters and the urban scavengers who stripped away the copper pipes and aluminum siding. Then the trucks started rolling through - day, night, didn't matter - dumping dirt and debris into empty lots, as if no one had ever lived nearby or ever would.

Anderson bought a home security system. She stayed indoors, kept her grandchildren inside too. It was no way to live, she remembers telling a friend. Residents were losing control of their neighborhood. They wanted to restore their part of the world, but how? They wanted to understand why so many of their former neighbors had been forced to flee.

"We didn't even call it predatory lending in the beginning," says Anderson, sitting on a thick brown couch at home, which she begged a local bank to refinance out of a bad loan. "We didn't know what it was, and we couldn't figure out why [lenders] would do it."

"Why," she asks, "does a multi-million dollar company need my $76-a-month payment?"

CLEVELAND'S DELINQUENCY rate on subprime mortgages is rivaled only by that of another famously ravaged city: Detroit. Slavic Village is perhaps the epicenter of a nationwide foreclosure epidemic.

The numbers are spinning out of control. In May, there were 90 percent more foreclosure filings in the country than a year ago.

Ohio, which is behind only California and Florida (both with much larger populations) in foreclosures, is in many ways at the forefront of the crisis. Its weak economy, with job losses in the hundreds of thousands and housing prices either static or declining, didn't help homeowners in bad loans. They didn't have enough money to refinance; there was little point in selling as buyers were hard to find, and the home had dropped significantly in value.

A lack of strong consumer protection laws left no legal recourse. Former state attorneys general Betty Montgomery and Jim Petro simply weren't interested in mining the state's existing consumer laws, however weak, or criminal fraud statutes, for ways to hold lenders and brokers accountable. Monetary damages won through civil lawsuits had little sway, as brokers declared bankruptcy or moved out of state.

Borrowers had no choice but to eat the loan terms and go into foreclosure.

Last year, 13,000 foreclosures were filed in Cuyahoga County. Officials predict that, even with more than 16,000 foreclosures by the end of 2007, the final meltdown is still to come.

"Ultimately, the people who created this mess - Wall Street - will have to clean it up," says Cuyahoga County Treasurer Jim Rokakis. "And they will. I don't think they've come to grips yet with the depths of the crisis."

How exactly Wall Street got involved in this mess goes back to people making decisions years ago, as far away as Washington, DC and New York City. Getting Wall Street to 'fess up - and pay up - is another matter entirely.

Back in the day, the guy seeking Barbara Anderson's hypothetical $76-a-month home mortgage would begin the process at a local bank. He'd be evaluated for credit risks and lent money according to his income and existing liabilities. Banks put large chunks of their money into homes and needed their owners to stay solvent and make payments.

But with all their money tied up in mortgages, banks had little left over to invest elsewhere. So the government sponsored private intermediaries (think Fannie Mae, short for "Federal National Mortgage Association," created in the 1930s) to buy residential mortgages from the nation's banks, pool the loans together and sell them as "securities," or mortgage bonds, on Wall Street.

Investors would profit from the cash flows generated by borrowers' monthly interest payments. And government-backed agencies like Fannie Mae made sure those bets were safe.

Banks now had a replenished source of money, previously tied up in mortgages, to make more home loans. And the secondary loan market was born. (Freddie Mac, or "Federal Home Loan Mortgage Corporation," was started in 1970 to expand this secondary market.)

Along the way, the private sector entered the picture. As investment trusts started buying and bundling loans, they were able to provide a wider range and larger volume of products.

Soon, a lot of money was available for mortgage loans, but not enough people were borrowing; supply had outstripped demand. In the early '90s, mortgage companies and independent mortgage brokers, unregulated by state or federal agencies, multiplied. They zoomed in on the subprime market - loans designed for higher-risk borrowers, people with weak or nonexistent credit histories. Disproportionate numbers of such borrowers were poor and black.

Abandoned Homes in slavic village - Weeds take over.

Ideally, the subprime market was intended to help people realize the American dream of owning a home. In reality, the Center for Responsible Lending projects that more than one million families will lose their properties. The game had been rigged: close as many high-interest loans as possible, collect the fees (based on those rates) and sell off the loans to Wall Street.

Sure, default rates would be higher. Investment bankers even factored in 20 percent and higher default rates into their business models. The remaining 70 percent, however, who were paying the padded fees and interest rates, would deliver easy profits. These were the riskiest bonds, those from the subprime sector, but they also offered the best returns.

As more unregulated brokers worked communities like Slavic Village, banks that were insured and regulated by federal authorities fled these higher-risk neighborhoods. To get in on this lucrative market, while remaining outside regulators' oversight, many banks created subprime subsidiaries or worked with freelance mortgage brokers.

Home mortgages became a hot commodity on Wall Street, and lending standards were loosened. Lenders stopped requiring brokers to verify borrowers' income or collect down payments. Some borrowers were even offered cash back at closing. The situation was ripe with opportunity for unscrupulous brokers, and the banks working with them only had to look the other way. Wall Street's investment trusts, which were buying on the secondary market, didn't check loan packages for fraud, and rating agencies made sure that investors continued to feel safe with these subprime products.

Deceptive pitches became more common, especially in low-income communities. Homeowners already in financial trouble - due to needed repairs or medical bills - were the most vulnerable: They were easier to coax into substantial loans that would generate high fees and interest payments. Many were encouraged to overstate their income on the paperwork, or it was done for them. Appraisers cited homes for far more than their actual value.

In many instances, the loans' interest rates ballooned in a matter of months. Loan flipping - repeat refinances to generate even more fees for lenders - was rampant.

It was the flip side of the discriminatory redlining that financial institutions had practiced decades ago, withholding loans from low-income neighborhoods. Now, poor communities were flooded with credit, but the terms were lopsided and the benefits would prove fleeting.

IN APRIL, Barbara Anderson and other members of "Bring Back the 70s" - a grassroots group of residents living between East 70th and 78th - cased the blocks of Slavic Village, counting vacant homes. They found more than 100, and more whose occupants were on the verge of foreclosure.

Working with Empowering and Strengthening Ohio's People (better known as ESOP, or the East Side Organizing Project), Anderson is now getting foreclosure-prevention information into as many hands as she can.

For now, however, the options are few. Cuyahoga County's Foreclosure Prevention Program, begun in 2005, provides counseling to those in danger of losing their homes and education for those thinking about entering a first mortgage. Last week, Cleveland City Council gave the Department of Consumer Affairs $300,000 to assist with counseling and distributing flyers with anti-predatory lending information.

But consumer education can only go so far. "It just can't compete with the lending industry," says treasurer Rokakis. Banks and mortgage companies spend millions each year developing new loan products and lobbying against stricter laws and regulations.

To some, like Federal Reserve Board Chairman Ben Bernanke, the predatory lending crisis seems manageable. The Fed, which has the power to prohibit unfair and deceptive practices, only now is "undertaking a thorough review of all its options under the law," Bernanke said late last month while speaking about the subprime mortgage market in Chicago.

That's because market forces are already working to reign in excesses, Bernanke said. Investors have the subprime market under scrutiny, lenders have tightened the leashes on mortgage brokers and the money supply for home loans has dried up. Subprime foreclosure rates nationwide were around 11 percent, Bernanke said.

"The self-correcting pullback may seem too late and too severe," he said, "but I believe in the long run that markets are better than regulators at allocating credit." The Fed must measure any new rules against the health of the above-board subprime loan market, Bernanke said.

A few days after that speech, a furious Rokakis repeated Bernanke's words at Congressional hearings chaired by Rep. Dennis Kucinich. Rokakis cited numbers from one loan servicing agency's Cleveland portfolio: After adding up homes already foreclosed, now in foreclosure, and mortgages 30 days late, more than 46 percent of the agency's loans were "under water or sinking fast."

So what's required is serious action from Wall Street, banks, regulators, elected officials and, as necessary, consumer lawyers. Indeed, there are legal, regulatory and legislative remedies that could curb abusive, predatory lending practices, make federal regulators more responsive, and bring Wall Street's money to the table. The most pressing need is finding money and banks to renegotiate people out of their bad loans.

Meanwhile, everyday residents in neighborhoods like Slavic Village are turning to plain old people power to take back their streets.

Without all of the above, Rokakis says, there's no recourse against the lending industry reinventing itself with new exploitative tactics.

"They'll correct for a while," Rokakis predicts. "And we'll be right back with a different kind of problem."

Next week: Solutions in the works to the foreclosure crisis.