Mike Melvin remembers the thrill of moving into his Atascadero home. Three years ago, he and his then-girlfriend had fallen in love with the cozy three-bedroom and its wood-burning stove and weatherbeaten white picket fence.
“It was our first home purchase,” said Melvin, who bought the house with no money down on an interest-only, fixed-rate mortgage that switched to a variable rate two months ago. “It’s like my life suddenly had meaning. It wasn’t the answer to all of my dreams, but it was a step in the right direction.”
Today, Melvin is behind on his loan payments and on the brink of losing the house. He said he’s contacted his lender for help, but so far the efforts have not been
fruitful.
“They’ve sent me a notice in the mail saying they’ve started the foreclosure process,” he said.
Melvin is one of many San Luis Obispo County residents who are struggling to hold onto their homes. While the number of foreclosures in the county is much lower than other California communities - including the counties of Riverside and San Bernardino (where just last month there were 1,750 and 1,337 foreclosures, respectively) - the sting is still being felt by homeowners from Paso Robles to Nipomo.
Overall, foreclosure activity - which includes notices of default, auction sale notices and bank repossessions - is up 20 percent in the county from March 2007, according to RealtyTrac, a firm that tracks real estate activity nationwide.
There were 490 notices of default-the first step in the foreclosure process-sent to homeowners from March 2007 to March 2008, RealtyTrac figures show. A total of 329 real estate owned properties - in which the lender takes ownership of the property - was recorded during that time period.
Foreclosure activity is greatest in the North County-Paso Robles and Atascadero, which are communities with a greater supply of housing development.
Creative financing
Although homeowners lose property for a variety of reasons - illness, job loss or divorce - many real estate experts and economists attribute this latest spike in foreclosure activity to people buying more house than they could afford. Eager to get into their first home or snap up investment property, many buyers chose creative financing options such as interest-only and adjustable-rate mortgages.
With a traditional mortgage, the interest rate is fixed for the life of the loan. Adjustable-rate mortgages are flexible, however. A hybrid adjustable-rate mortgage, for example, offers a fixed rate for a period of time — three, five or 10 years - and then adjusts each year after that.
Borrowers who choose interest- only loans pay the interest for a specified period of time - typically three to five years. When that period ends, they start paying the principal and could be saddled with higher interest rates (they’re subject to higher interest rates because of higher risk for lenders) and higher payments, ranging from a few hundred dollars to thousands of dollars every month.
Dave Wilson, a mortgage broker with Mariner Mortgage in Arroyo Grande, said some people took calculated risks, banking on the fact that the housing market would continue to appreciate. Others, he said, did not have a good grasp of the loan terms or were steered toward products not necessarily suited for them.
“A mortgage loan is a tool, and no one tool fixes all jobs and not all loans are appropriate for all homebuyers,” he said. “It’s the responsibility of the loan officer to pair the right tool for the right job.”
Kirk Lesh, real estate economist with the UCSB Economic Forecast Project, also believes that several factors contributed to the increase in foreclosure activity. Some people, he said, had taken the creative financing options, hoping to refinance later on, while others bought homes as investments with the goal of soon selling them for a profit. Some were given loans without any down payments or income verification.
“I think the interest rates got so low that it just created some greed in the market,” he said. “The zero-money-down loan was a good example of the lowering of loan standards.”
Attempts to help
Lesh said it’s too soon to tell how the foreclosure crisis will shake out across the country, although there’s some help available for people trying to stay in their homes.
The Hope Now Alliance, for instance, is a national group of housing counselors, investors and mortgage lenders who are helping to prevent foreclosures. The alliance, formed at the urging of the Department of Housing and Urban Development, says it has helped more than 1 million homeowners avoid foreclosure since July 2007.
The Hope Now program froze rates for borrowers who had never been delinquent on their payments but who faced resets on their subprime adjustable- rate mortgages.A new program, Project Lifeline, expanded on the earlier Hope Now efforts and now includes homeowners who are seriously delinquent with subprime and other types of loans.
Lesh said any assistance for homeowners in trouble is great. However, he wonders if the Hope Now program goes far enough.
“A lot of their workouts (helping homeowners to renegotiate the principal) are just taking a 30-year mortgage and making it a 40-year,” he said. “It’s just extending the payment. The other thing is that they freeze the interest rate for a year. But the concern is that on an ARM, if it goes back up after the freeze, are we just delaying a foreclosure?”
Lesh also is concerned that help may come too late for some homeowners, who may be stuck in a system that is being bombarded with requests.
“I’m keeping my fingers crossed,” he said.
Daren Blomquist, a Realty- Trac spokesman, said there is hope as San Luis Obispo County is faring better than many others across California, which had the second highest foreclosure rate in the nation in March (Florida had the highest). One in every 204 California households received a foreclosure filing last month-2.6 times the national average, according to RealtyTrac.
“It will probably get a little bit worse before it gets better,” he said. “There’s another wave of foreclosures in the offing. There were a lot of loans (with adjustable-rate mortgages) that have not reset yet, and even those that have reset, there’s still a delay from the time they reset to the time they go into foreclosure.
“With banks being overwhelmed, they may not get to processing foreclosures until several months down the road, so we could expect them to hit later this year.”
But Blomquist added: “It does seem that the county is not going to be hit as hard as many other areas.”
Little consolation
That may be little consolation for San Luis Obispo County homeowners who can no longer afford their monthly mortgage payments.
Three years ago, Kim Missamore bought a three-bedroom, two-bath home on an acre in Shandon for her children with an interest-only loan. When her adult children moved out and stopped helping pay the mortgage, Missamore said she was left with the payments, which are $1,400 a month.
Even with a renter in the Shandon home, Missamore said it’s difficult to keep up with the interest payments. So, she’s living with her daughter in Atascadero and paying what she can to avoid going into foreclosure and damaging her credit.
“I’d love to sell it, but I’m stuck,” she said. “It’s scary. If I don’t get a loan modification, I may have to let it go.”
Melvin, who has owned a plastering company for 23 years, was paying about $1,600 a month at 6.25 percent, but then his mortgage reset, and now the payments are $2,200 with an interest rate of 7.25 percent.
“I was completely naïve,” Melvin said. “Everyone was telling me that in three years, when the equity in the house increased, I could refinance and get a better loan. That’s where I am now, but the market crashed and the value of the house went down.”
Melvin said he’s tried to work with his lender for the past six months.
“All I can do is hope that the mortgage company comes around,” he said. “I’ve sacrificed a lot in three years to hang on to it.”
Even so, Melvin said he’s not sour on home ownership.
“I don’t think we can make too much of it,” he said. “It’s a critical part of our life to take responsibility for something.”
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