To many people in the affluent Bay Area, losing a home to foreclosure sounds like a Depression-era relic or a Rust Belt phenomenon. Our real estate prices have defied gravity for so long; our job market is so strong; our cachet as a place to live seems so obvious. How could foreclosures happen here?
But in recent months, the Bay Area has proven to be home to numerous victims of the subprime loan debacle. Just like elsewhere in the country, people here with tarnished credit or limited funds bought houses that proved to be beyond their means, often putting little or no money down, and borrowing money through exotic, expensive loans that were virtual time bombs set to soar to unaffordable levels after an introductory period.
Aggressive mortgage brokers, voracious lenders and naive consumers combined to create an unstable situation. The tipping point came a year and a half ago when real estate prices started to flatten or fall in some areas. Suddenly, home buyers who had planned to refinance saw that door slammed shut because they no longer had equity in their houses and their "introductory rate" mortgages quickly became unaffordable as interest rates -- and their monthly payments -- rose. This year, almost 1 million people nationwide will enter a stage of foreclosure, according to RealtyTrac.com. That great tidal wave is ravaging the already beleaguered real estate market and causing repercussions from Wall Street to Washington, D.C.
In the second quarter of this year, 2,206 homes in the nine-county Bay Area were lost to foreclosure, according to real estate service DataQuick Information Systems. That was the highest number for this area since DataQuick started tracking foreclosures in 1988, and an almost nine-fold increase from 258 foreclosures in the April-June period last year. Also in the second quarter, DataQuick said 7,696 Bay Area homeowners received notices that they were in default on their mortgage payments -- the first step in the foreclosure process. That was more than double the 2,910 default notices received at the same time last year.
Some observers say that many of those facing foreclosure should never have bought a house. To be sure, many consumers were seduced by the American dream of homeownership and so financially unsophisticated that they didn't apply due diligence. For Bay Area residents, more than a decade of consistently rising home prices may have led to a mob mentality of people overeager to jump into the real estate market, confident they would quickly gain equity.
On the other side of the equation, many lenders pushed the envelope. For example, Ameriquest Mortgage Co., the nation's leading subprime lender, is now paying $325 million to 725,000 borrowers nationwide for allegedly improper sales practices, including failing to adequately disclose home-loan terms and rates, refinancing borrowers into inappropriate loans, inflating home appraisals, and charging excessive fees and prepayment penalties.
Foreclosures have a much broader impact than just misfortune for the people who lose their homes. Within neighborhoods, they cause real estate prices to sink because houses on the verge of foreclosure or already foreclosed upon often are resold at lower prices. That, in turn, has a ripple effect on the overall real estate market. Increasing foreclosures are one reason the current housing downturn has proven to be more severe and long-lasting than anticipated.
Foreclosures also take a deeply personal toll. As shown in these profiles of several Bay Area homeowners who got in over their heads, a foreclosure goes through many stages, and is an extended and complex process during which homeowners desperately search for solutions to save their homes and salvage their credit ratings.
Foreclosure trail
Foreclosure is a complicated process that usually takes many months. Here are some of the steps involved in a foreclosure.
Default: When a homeowner falls behind on mortgage payments -- how far behind varies with different lenders -- the bank sends a notice of default and records it with the county recorder's office. Homeowners can try to rectify the situation by bringing payments up to date or refinancing. They can try to sell the house, but selling for less than they owe on the mortgage -- a "short sale" -- requires approval from the lender and can have negative tax consequences. The percentage of default notices that result in foreclosure is rising. DataQuick Information Service said one year ago only 12 percent of defaults resulted in foreclosure. This year, 45.4 percent of defaults ended up being foreclosed.
Notice of trustee sale: Three months after the notice of default, the lender can announce that it is putting the property up for auction. The lender notifies the homeowner and files a notice with the county recorder's office. It is common for auctions to be postponed, sometimes multiple times and often at the last minute, as the homeowner tries to stave off foreclosure.
Auction: Properties are auctioned on the courthouse steps in the county where they are located. Because sales are all-cash and "as is," the vast majority of homes revert to the lender at auction. Once a house has been through a courthouse auction, a trustee's deed is filed with the county signifying that it no longer belongs to the homeowner and is a foreclosure.
Resources
Here are some places homeowners facing foreclosure can turn for assistance.
Your bank: Lenders stress that homeowners should contact their lender immediately if they have trouble making their mortgage payments. Ask to speak to the workout department. Ask if your loan can be modified, for example, by adding a year onto its term. Ask if you qualify for "forbearance" -- temporary reduction or suspension of payments.
ACORN Housing -- www.acornhousing.org; (866) 672-2676 or (888) 409-3557: This nonprofit has programs with many lenders to help homeowners negotiate affordable loan workouts, payment agreements and foreclosure prevention. It also advocates for policy reforms to stop predatory lending.
Neighborhood Assistance Corp. of America -- www.naca.com; (888) 302-6222: Nonprofit has a $1 billion fund to offer below-market refinances for people who are at risk of losing their homes. Homeowners must meet a variety of qualifications.
NeighborWorks America Homeownership Preservation Foundation -- links.sfgate.com/ZMV, (888) 995-4673: This community development group offers free foreclosure-avoidance counseling and assistance contacting lenders.
HUD-approved housing counseling agencies -- links.sfgate.com/ZMW(800) 569-4287: The U.S. Department of Housing and Urban Development sponsors housing counseling agencies throughout the country that offer advice at little or no cost.
Source: Chronicle research
Johnny Pitts, 42, loves tigers so much that he's crammed almost every inch of his bedroom with big-cat keepsakes. A life-size toy tiger and her two cubs crouch atop the tiger bedspread on his bed, nestled next to a tiger watercolor and a tiger rug. The remaining surfaces are decorated with African statues and inspirational Christian sayings.
"My home is my oasis," said Pitts, a cheerful and talkative man who works as a driver for San Francisco Muni. "It's like Disneyland come to life," he added proudly, showing off the hundreds of color magnets -- a vivid rain forest of tropical birds and exotic fruit -- adorning his kitchen.
Pitts' wide-eyed enthusiasm worked against him when he bought his house. A couple of years ago, a friend referred Pitts to a mortgage broker.
The broker, who also acted as Pitts' real estate agent, showed him the three-bedroom house on Oakland's MacArthur Boulevard. The 1930s bungalow was rundown and the street is a busy thoroughfare, but Pitts liked the neighborhood and agreed to buy the house for $429,950. Pitts said the broker told him his mortgage would be $2,000 a month with no down payment.
Pitts put himself entirely in the broker's hands. He didn't scrutinize the paperwork. He didn't get a home inspection. After he moved in, it turned out his mortgage payment was indeed $2,039. But there was a second mortgage with a payment of $841. Pitts makes about $4,000 a month, so that meant three-quarters of his income is eaten up by the mortgage.
After a few months, Pitts got a bill for supplemental property tax, which is a standard assessment for new owners. That $4,000 hit caused him to skip a couple of mortgage payments last year and he spent several months getting caught up.
"The money I put away for rainy days, my 'do not touch fund' is going away," he said.
Pitts said he fell behind on his mortgage again this year due to higher monthly charges for taxes. He's been working extra shifts and now has finally gotten caught up with his mortgage.
But there's a bigger problem around the corner.
Pitts' first mortgage, currently at an interest rate of 10.026 percent, will reset higher in October, adding $850 onto his payments. That would mean a monthly total of $3,730, plus several hundred more in taxes and insurance.
Meanwhile, the cooling real estate market means his house is now worth $330,000, according to an appraiser Pitts hired this month because he hopes to reduce his property taxes.
"I've learned all this new terminology," Pitts said ruefully. "I'm what they call 'upside down' -- that means I owe more than the house is worth. You have to have equity in your house to refinance, and I don't have any."
Pitts turned to nonprofit ACORN Housing for assistance. He hopes his lender will agree to modify his loan to avoid the huge increase in October or even to lower his payments. He plans to get a roommate and continue working extra shifts.
"All I'm asking for is a loan modification," Pitts said. "I make good money, I don't have other bills.''
The mortgage broker has closed his company and could not be located for comment. The mortgage originator, BNC Mortgage of Irvine, a subprime lender owned by Wall Street firm Lehman Bros., resold Pitts' mortgage, as is common in the business.
"As a responsible lender, BNC Mortgage works hard to ensure that its loans meet our underwriting guidelines," a spokesman said.
Pitts' loans are now being serviced by banking powerhouse Chase, part of JP Morgan Chase & Co. Chase declined to say who currently owns the loan.
"Chase has been working with (Pitts) over a number of months on getting current with the loan," said Tom Kelly, a Chase spokesman. "We are willing to work with him or a community group and look at possibilities. Sometimes when you're in a difficult financial situation, the choices might not be pretty."
In terms of modifying Pitts' loan, Kelly said: "We have to make sure it meets the legal and contractual obligations that we have with investors."
Meanwhile Pitts feels like he's gotten a lifetime's worth of financial education.
"This home ownership is not what it's cracked up to be," he said. "My home is my little piece of the Plymouth rock. I'm going to keep working like a dog to keep it."
Johnny Pitts
Pitts, 42, is a San Francisco Muni driver.
Monthly net income: About $4,000.
House: Three-bedroom, Oakland, purchased in 2005 for $429,950; recently appraised at $330,000.
Mortgage: $2,880 a month (not including taxes and insurance), due to reset to $3,730 a month in October.
Status: Fell behind on mortgage payments but has caught up. Will not be able to afford new mortgage rate in October.
Joann Gardner was scared. Mortgage payments on her family
home were now eight months in arrears. The lender planned to auction the house in foreclosure proceedings at noon. She was getting ready to drive to the Alameda County Courthouse to see what would happen. She pictured that "bigwigs, investors (would) fork out the money."
Just 90 minutes before the appointed time on July 3, Gardner got a phone call that the auction had been postponed for a month. Her real estate agent said the lender had agreed to allow time to try to sell the house to an investor who would rent it back to the family.
"It's a big load off my shoulders for now," said Gardner, a voluble woman with high cheekbones and an aquiline nose. "But I know it's just postponing the inevitable. They will be putting me out of the frying pan into something worse."
The inevitable seems to be that Gardner, 50, and her elderly parents will lose their modest two-bedroom home in Oakland's Sobrante Park neighborhood, where she's lived her whole life. Her parents bought the house in 1954 for $11,500 and raised their four children there, outliving two of them.
After refinancing more than a dozen times over the years to pull out money, the Gardners now owe $454,500 on the house. She thinks it is probably worth about $350,000.
Gardner said her lack of financial knowledge and the need for funds to fix up the house and pay off bills kept inducing her to refinance. Public records show that the home was refinanced four times in the past two years.
Each time, Gardner said, she didn't understand the mortgage terms, and the family did not receive as much cash out as they had expected.
"I've learned a valuable lesson at the expense of this house," she said. "People don't have your back."
On the July day when the auction was scheduled, the compact house brimmed with activity. In the back yard, crammed with tools and debris, Gardner's father, Johnnie Gardner, 86, shuffled stiffly around his pickup truck. Her mom, Estelle Gardner, 87, watched TV in her bedroom. Joann Gardner's great-nephew, Jaron Isom, 20, who stays in the small den, played computer games, while his visiting 4-year-old sister, Maaiah, scribbled out a series of drawings.
Joann Gardner and a neighbor sat at the kitchen table shaking their heads as they looked through the loan documents she and her dad had signed on Halloween, for the most-recent refinance, which went into effect in November.
"It would have to be an intervention from God if it turned around," Gardner said.
The papers show that the monthly payments for mortgage, interest and taxes are $3,362.
Johnnie Gardner's monthly income from Social Security and his pension from 45 years as an electrician at the Oakland Naval Supply Center is $3,144, while Joann Gardner made about $2,100 a month from her secretarial job.
How did Gardner think they would afford the mortgage?
"We were supposed to be cashed out $15,000," she said. "I thought with having that cushion, I'd take a little out each time, and as Daddy's checks came in, it would stack up to enough to pay for the mortgage, and my income would go for utilities and groceries."
Instead, after the lender paid off credit cards for her and her father totaling about $14,000, she only got $1,260.
Then she lost her job in February because she was taking too much time off to tend to her parents. Her mother has Alzheimer's, and her father has arthritis and digestion problems.
When the first mortgage payment came due, Gardner realized they were in over their heads and called the lender.
"They said, 'We can't help you, it's a done deal, you're going to have to try to make those payments,' " she said.
Ian Kideyz, a spokesman for the Gardners' mortgage broker, Apply4Homes of La Jolla, said the refinance helped the family because paying off the credit cards saved $666 in monthly payments, and their new mortgage payment of $3,007 (not including taxes and insurance) was only $133 more than their previous payment.
"I know they're upset because they can't make the payments, but they were put in a better situation," he said. "Their monthly obligations have been reduced. There were no excessive fees charged on this loan."
Chris Orlando, a spokesman for Argent Mortgage Co. of Irvine (Orange County), said, "Argent is a wholesale lender, which means the company had no direct interaction with the customer. We deal through independent brokers and they coordinate with their clients. The loan was approved within our underwriting guidelines based on documented income."
Because of her Alzheimer's disease, Estelle Gardner doesn't always remember that the house is in jeopardy, but sometimes she has moments of insight on the family's situation.
"I would hate to have to go to glory and leave them in the condition where they lose this home," she said. "I always kept up my bills."
The Gardner family
Johnnie Gardner, 86, and Estelle Gardner, 87. The elder Gardners are retired, and Joann Gardner, 50, stays home to care for them after losing her job in February.
Monthly net income: Johnnie Gardner's Social Security and pension payments of $3,144.
House: Two-bedroom, Oakland, purchased in 1954 for $11,500. After refinancing many times, there is no more equity in the home, which is probably worth about $350,000.
Mortgage: The Gardners owe $454,500. Monthly payments are $3,007 for the mortgage, plus $355 for taxes and insurance.
Status: Eight months in arrears; house scheduled for foreclosure auction Friday.
"This was my favorite wedding gift of all time," Vanessa Hahn said as she packed up her Cuisinart toaster, along with the few possessions still in her "fairy-tale" Fairfield home. In front of the spacious house hung a "For Sale" sign -- one of several in the subdivision.
In a few hours, Vanessa and her toddler, Jonah, would leave for good to join her husband, Jeff, in Los Angeles, where he'd found a steady job. Jeff Hahn had already driven a U-Haul full of their furniture down the previous week, after the couple realized they could no longer make ends meet in the Bay Area.
Their monthly mortgage payments are now $5,000 -- about the same as their take-home income. Jeff's business of importing automotive parts for racing cars had failed to take off as quickly as he had hoped, and ate up all his savings. Vanessa's work as a behavioral therapist for autistic children isn't particularly high-paying; in fact, she'd recently switched to working in day care so she could bring Jonah along and cut down on child care bills.
They missed several mortgage payments. They put the house on the market without generating any interest. Then Jeff found the Los Angeles job.
"This is the only way to get out of this situation we're in," she said. "No one wants to leave an area they're so fond of."
Jeff Hahn bought the house, a nicely laid-out decade-old four-bedroom Colonial in a neighborhood of classic two-story homes, three years ago for $495,000. Later that year, he met Vanessa, they fell in love and started a family.
"When I first bought the house, everything was too good to be true," Jeff recalled. "No money down, instantly gaining $10,000 in equity. Written in very small print was that the loan will adjust in two years. Everybody I talked to said it would only be a (minimal) increase."
Instead his two loans, initially totaling $2,200 a month, hit $3,700 last September. When he tried to refinance, Hahn found out that he had been a victim of identity theft. And, as a newly self-employed person, he had to produce extra documentation on his income. All that slowed down the "refi" process for several months, during which the couple scrimped and borrowed to make the larger payments. Several loans fells through for various technicalities.
By the time a new loan finally came through in March, not only had the subprime mess caused banks to tighten their lending standards, but the home's value had dipped. Jeff had borrowed against the home's equity to pay off some bills and start his business. He also took out money to cover closing costs for the new $570,000 loan.
The 40-year fixed-rate loan, at an interest rate of 10.5 percent, carries monthly payments of $5,000. It was underwritten by BNC Mortgage of Irvine (Orange County), a subsidiary of Wall Street firm Lehman Bros. BNC said through a spokesman that it is a responsible lender and works hard to ensure that loans meet its underwriting guidelines.
Why did Hahn accept a loan with higher monthly payments?
"I was using credit cards to subsidize the payments" on the existing mortgage, he said. "I was about to miss a payment. My lender said, 'Take the loan, because it will save your credit, that's the first issue. Then you can sell the house.' "
The Hahns have not made any payments on the loan since it was funded in March.
"Honestly, I gave up once (monthly payments) hit $5,000," Jeff Hahn said. "I said I can't do this."
They have not received a notice of default -- the first step in the foreclosure process -- although they have received numerous calls and letters from Chase, which services the mortgage.
"If people don't make payments early in the mortgage, we try to act very quickly to contact them," said Chase spokesman Tom Kelly. "We need to talk to the person to find out what's going on."
The Hahns put their house on the market, only to discover that real estate prices were spiraling downward in their area. Their house, which had been appraised for $630,000 in January, was now worth less. They started out listing it at $575,000, and now have dropped the price to $555,000.
Selling for less than the outstanding mortgage is called a "short sale" and requires bank approval. It does not hurt a homeowner's credit as much as a foreclosure, but the late payments still appear on credit reports, and homeowners can end up liable for extra taxes. Chase's Kelly was unable to say what the status was of the Hahns' request for a short sale, but he said in general it takes 45 to 60 days to get a decision.
So far, the Hahns haven't received any offers.
"My neighbor is selling his house for $505,000," Hahn said. "My Realtor wants me to drop my price another 100 grand."
The job in Los Angeles seemed like one way to get financial stability.
What if the house goes into foreclosure? "We're hoping it sells before it goes down that road," Vanessa Hahn said. "We're in limbo now, doing what we can."
Jeff Hahn said he is bitter about his experience with home ownership.
"I've probably wasted $90,000 over the past three years and have nothing to show for it," he said. "I lost my house, have to relocate my family and ruined my credit. Now my family will probably never own a house again because we will be considered even more of a risk in the future."
The Hahn family
Jeffrey Hahn, 30, car-parts importer; Vanessa Hahn, 24, works with autistic children; and Jonah, 19 months.
Monthly net income: About $5,000 a month.
House: Four-bedroom in Fairfield, purchased in 2004 for $495,000.
Mortgage: Total owed on house is now $570,000; monthly payments are $5,000.
Status: Three months behind on mortgage; house on market for $555,000.
Carlos Cil, 32, cherishes his Hispanic heritage, wearing embroidered shirts from his native Guatemala, dancing with an Aztec troupe and decorating his house with colorful artifacts from home, as well as pieces from his wife Flore's native Peru.
When he bought a house two years ago, he trusted his mortgage broker because she's from Mexico, so he figured she would look out for a fellow immigrant.
Cil told the broker he could only afford $2,200 a month. He makes $2,600 a month as a painter for the Berkeley Unified School District, but is accustomed to picking up extra jobs to supplement his income so he figured he could stretch for a bit. His wife stays home full time with their 13-month-old son, Brandon.
Cil bought a three-bedroom home in Vallejo for $450,000 with no down payment. The mortgage brokerage acted as his real estate agent. He said he was told his monthly payments would be $2,600 a month. The day he signed the loan papers, he found out the payments would be $2,900 a month, not including taxes and insurance. Cil said he balked, but the brokerage assured him that he'd easily be able to refinance in less than a year to lower his payments.
Reza Khan, an official with Brokaw Capital Financing in San Jose, which brokered the loan, said his company went out of its way to look out for Cil's best interests. It did not include any prepayment penalties, even though those would have earned it more money, Khan said, thus giving Cil more flexibility to refinance. The home was appraised at $465,000 at the time of sale and then sold for $450,000, less a $10,000 seller credit arranged by Brokaw. "So in reality he got this house for $25,000 below market, back in 2005 when the market was booming," Khan said. "In that market, that was a great deal."
Khan said Cil signed a letter saying his income was sufficient for the loan. In such "stated income" loans, lenders do not verify the income, and charge a higher rate because the loans are riskier. Cil paid an interest rate of 7.15 percent on his primary loan and 9.75 percent on his secondary loan, Khan said.
"We've done everything by the book and we have every documentation to back it up," Khan said.
As has happened in many outlying parts of the Bay Area, home prices in Vallejo softened.
"After one year, I couldn't refinance because the value of the houses is not really high here in the neighborhood," Cil said. His brother, who had been staying with the couple and paying rent, moved out, which reduced their income.
Cil's initial mortgage payments did not include an impound account for insurance and property taxes. That was added about four months ago, bringing the monthly payments to $3,500. The loan is set to adjust still higher in September, when its two-year interest-only period will be up; he's not sure how much higher it will go.
Cil was determined not to miss a payment. He said he has been working 12 to 16 hours almost every Saturday and Sunday on extra painting jobs -- and he has kept current with the payments.
The couple did everything they could to economize, getting rid of their cable TV service, landline phone, and even taking bulbs out of light fixtures to cut electricity costs.
"Saving every little bit of money helps," Cil said, pointing to the tomatoes and chile peppers they grow in the sunny yard, along with marigolds for Día de los Muertos.
Keeping up with the payments has proven to be a saving grace.
Cil's steady payment record means he can qualify to refinance through Neighborhood Assistance Corp. of America, a nonprofit that has secured $1 billion from banks such as Bank of America and Citibank to help convert subprime mortgages into long-term loans with fixed rates. He should be able to get a 30-year fixed-rate loan at an interest rate of 1 point below market rate (about 5.75 percent) with no prepayment penalties, according to Winifred Gant, director of the assistance corporation's Oakland office. According to standard mortgage calculators, that would put Cil's monthly payments at $2,626 a month -- still a stretch. Cil said they might rent out rooms if the payments prove high.
"He's been making payments on time, which is a plus for him even though it's really difficult for him to do that," Gant said. "He's had no late payments on his mortgage. Clearly he's made every effort even at the expense of not paying something else. We can help people with late payments, but this is better."
Cil said he is hopeful that the new loan will work out.
"I keep my spirits up," he said. "I don't want to lose the house. It would be really sad to lose it when I've worked so hard."
The Cil family
Carlos Cil, 32, painter; Flore Cil, 28, homemaker; and Brandon, 13 months.
Monthly net income: $2,600 from full-time job (not counting side work).
House: Three-bedroom in Vallejo, purchased in 2005 for $450,000, not sure of current value.
Mortgage: Monthly payments are now $3,500 (including taxes) and are due to reset higher in September.
Status: Kept current on mortgage payments; hopes to refinance this week.
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