Subprime loan crisis is hitting Vallejo hard

Report predicts nearly 1 in 4 will end in foreclosure

Vallejo is the Bay Area's version of ground zero for the subprime loan crisis.
A significant number of residents of the largely blue-collar city of 120,000 have taken out subprime loans -- expensive mortgages issued to people with poor credit.
In 2005, almost one-quarter of mortgages in the Vallejo-Fairfield metropolitan area were subprime loans, according to the Center for Responsible Lending's analysis of Home Mortgage Disclosure Act data.
Vallejo home prices fell 8.5 percent from November to March, according to DataQuick Information Services. For people who bought in recent months without putting any money down, that means they may owe more on their mortgage than the house is worth.
In a report called "Losing Ground," the center spotlights the Vallejo-Fairfield metropolitan area (which comprises all of Solano County) as a potential trouble spot, with one of the highest projected foreclosure rates in the country. The report predicted "that 23.8 percent of subprimes there will end in foreclosure," said Paul Leonard, director of the center's office in Oakland.
Areas with high foreclosure rates tend to share some characteristics. One is sinking home prices. Many "tend to be on the perimeter of major metropolitan areas rather than at the heart," said Leonard. "The housing prices in those areas are most subject to change. Often they tend to have a high concentration of minorities."
Much of the Bay Area has been insulated from the subprime fiasco because home prices have continued to rise and affluent residents qualified for the more- desirable prime mortgages.
But in outlying areas where home prices have fallen and incomes are lower, the subprime fallout is making an impact.
In addition to Vallejo, other Bay Area localities facing the problem are Richmond, Antioch, Pittsburg and parts of Oakland.
In the past few years, aggressive lenders and mortgage brokers pushed subprime loans on people who couldn't really afford them. Most came with low "teaser" rates. As those rates have expired in recent months, tens of thousands of homeowners around the country have seen their mortgage payments soar, have been unable to keep up and have received notices of default from their lenders -- the first step in the foreclosure process.
At nonprofit counseling agency Vallejo Neighborhood Housing Services, the phone has been ringing off the hook for several months, with about 40 people a week calling because they have fallen behind in their mortgage payments, according to Carol Hardy, a housing counselor there. That contrasts with the 12 months that ended in August, during which the agency advised just eight families on foreclosure prevention.
The people seeking help have almost identical stories, Hardy said. They bought homes using subprime loans. After a low initial rate, their monthly payments skyrocketed. Meanwhile, home prices in their neighborhoods went down, so they cannot easily sell or refinance. The result is that the homeowners owe more on their homes than the houses are worth.
"They're between a rock and a hard spot," Hardy said.
Hardy said her clients tend to be blue-collar workers who earn close to the median income for Solano County, which is $75,400 for a family of four. Some of them used what are called stated-income loans, meaning a loan officer allowed them to claim that their earnings were higher than they are.
They bought homes about two years ago, using a type of mortgage loan in which they made low, interest-only payments for two years, followed by 28 years of adjustable-rate payments. Usually they did not make down payments. Once the initial two years were up, their monthly mortgage payments shot up.
"Nobody sat down with them and said if your interest rate goes up just 2 percent, here's what your house payments will be," she said. "These people all of a sudden are getting notices that in 60 days their house payments will go up $600 or $800 a month, and they say 'I can't do that.' "
In Solano County, 116 homeowners received notices of default last March, according to real estate information service DataQuick. Such notices, which banks send when borrowers fall behind in their payments, are the first step in the foreclosure process. By August, the number of foreclosure notices had almost doubled. By March, it had almost tripled to 338. During the 12 months ended in March, 2,555 Solano households received the notices, according to DataQuick.
The other end of the foreclosure process, which typically comes many months after a notice of default, occurs when a home is sold at auction. Not all houses that receive notices of default end up in foreclosure; sometimes the homeowner is able to rectify the situation or sell the home before a foreclosure occurs.
In Solano County, seven houses were sold at foreclosure auctions in March 2006. The number has built steadily since. In the same month this year, 89 properties changed hands in foreclosure auctions, according to DataQuick. For the 12 months that ended in March, 441 properties were sold at foreclosure auctions.
Alameda and Contra Costa counties also have seen notices of default and foreclosure auction sales escalate, although the numbers are small relative to those counties' populations. In the rest of the Bay Area -- San Francisco, Marin, San Mateo, Santa Clara, Napa and Sonoma counties -- foreclosure notices and auctions have increased, but are still at negligible levels.
Consumer advocates trying to help people facing foreclosure say their job is harder than ever.
"Until six months ago, we could almost always save the person's investment, either by helping them to refinance or explaining that they needed to sell and get their equity out before foreclosure," said Martin Eichner, director of dispute resolution at Project Sentinel, a nonprofit HUD counseling agency in Sunnyvale.
"But more and more, the calls we're getting are from people who bought on a shoestring and have few, if any, options to avoid the foreclosure. They haven't built up any equity and they put themselves in loans that were essentially doomed to fail with 100 percent financing and/or negative amortization."
In addition, lenders have tightened up standards, so that people with poor credit have a harder time getting qualified for loans.
Hardy said her clients typically wait too long to seek help.
"They're not coming in until they're two or three months past due," she said. "Then you're talking about maybe $10,000 behind. If they would come in when they're 30 days past due, then we could help them rearrange their budgets, at least put a temporary Band-Aid on the problem."
She tries to negotiate with lenders to arrange for an extended loan period, but so far none has been amenable. Instead, all of Hardy's clients have put their homes on the market at the request of their mortgage holders. None of them has received an offer.
"We have very large inventories in Vallejo of houses for sale," said Jeff Dennis, a president with Coldwell Banker in Benicia and president of the Solano Association of Realtors.
If the homeowners do sell their homes, it is likely to be what is called a "short sale," where the purchase price is less than the amount owed on the mortgage. Such sales require the lenders' approval and can have negative tax consequences for the homeowner, but they do prevent the black mark of a foreclosure on the homeowner's credit report.
Tarnished credit and a possible tax bill are serious consequences, but they are not the same as actually losing money. Defaulting homeowners who bought recently, did not make down payments and paid only minimal monthly payments to start are not faced with losing hard-earned savings. Some people might compare their situation to renters -- with the added twist that once foreclosure proceedings start, they generally can continue to live in their homes without making any payments until the lender evicts them, which can take many months.
Vallejo Neighborhood Housing Services is too overloaded to handle new cases, so it refers calls to a toll-free number, (888) 995-4673, run by the Homeownership Preservation Foundation, a nonprofit group that tries to preserve homeownership.
"Calls (from across the nation) have been increasing at an absolutely crazy rate," said Tracy Morgan, a vice president at the foundation. "We've been getting 650 calls a day for the last month or two. A year ago we were only getting 75 calls a day."
On a recent weekday, Hardy met with one of the few new clients she's been able to accept. The client, Laura Espinosa, is not a subprime borrower, but someone who fell behind on her mortgage because of a combination of circumstances: a divorce, reduced hours at her nursing job and several big unexpected repairs on her Vallejo townhome. Espinosa has already found a second job to help her catch up financially. Hardy worked with her on a budget and offered to contact her lender to arrange a payment plan.
"You are an exception to the rule because I know there is a way to work this out," Hardy told Espinosa. "You've got equity; you've got income; you've got a manageable house payment. All you need is a little guidance. Truthfully, some of (my other clients) need a miracle."
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By Carolyn Said, San Francisco Chronicle