Losing it all: Subprime loan mess slamming doors on homebuyers in Central Virginia

By Bryan Gentry

Published: November 15, 2008

Look up Lynchburg-area foreclosures from this year in our database

 

You wouldn’t expect a $1 million home on Easy Street on Smith Mountain Lake to end up in the same situation as a $20,000 house from inner-city Lynchburg.

One was built as a lakeside mini-mansion in 2006. It has 5,200 square feet, granite countertops, cathedral ceilings and geothermal heat.

The other was built in 1892 with a wood frame and siding. Its 1,500 square feet are warmed with electric baseboard heaters.

Both met the same fate this year.

Foreclosure.

So did more than 200 other homes in the Lynchburg area. After homeowners failed to make mortgage payments, lenders ultimately took the homes to foreclosure auctions.

An examination by The News & Advance of land records in Lynchburg and the counties of Amherst, Appomattox, Bedford and Campbell show that more people have lost their homes this year than last year, up 33 percent overall.

From January through August, local property owners — including individuals and a few businesses — lost 211 properties to foreclosure. Records showed 159 foreclosures over the same period in 2007.

The number of foreclosures nearly doubled in Bedford County, from 42 to 82, including expensive homes on Smith Mountain Lake and in Forest.

In Lynchburg, the number of foreclosures grew by 21 properties, or 39 percent, mainly in low-income neighborhoods.

While the pace of foreclosures has picked up in the Lynchburg area, the increase is considerably lower than the national rate, which is driven mainly by mortgage defaults in California, Nevada and Florida.

According to RealtyTrac, a company that tracks foreclosure activity, the nation had 75 percent more foreclosure filings in 2007 than in 2006. The increase has been about 50 percent so far this year.

One of the key elements in Lynchburg’s foreclosure trends is subprime lending, the scapegoat that has borne much of the blame nationally.

Subprime mortgages generally were given to borrowers with imperfect credit or no documentation of income. Because of the higher risk with these loans, they usually charged interest rates several points higher than conventional mortgages.

Many of the mortgages that went to foreclosure this year in the Lynchburg area bore the signs of subprime borrowing:

ä The average interest rate, when listed in land records, was 7.9 percent. By comparison, conventional rates averaged less than 6 percent from 2003 through 2005, when many of the foreclosed mortgage were secured.

ä Nearly 10 percent of the foreclosed properties had interest rates that started at 10 percent or higher.

ä At least 68 of the properties had mortgages financed with adjustable-rate loans, which trigger automatic interest-rate increases after a few years.

ä The top lenders whose local loans ended in foreclosure were big players in the subprime industry: Decision One Mortgage Company, New Century Mortgage and Option One Mortgage Company.

Overall, subprime loans have a small presence in Lynchburg. Several local banks never offered them. Even American Home Mortgage, one of the nation’s largest subprime lenders, didn’t make many of those loans here, a former employee said.

“It was probably less than 10 percent of what we did here,” said Billy Woolridge, a local mortgage originator who worked for American Home for six months before the company went bankrupt last year. He also saw little demand for subprime loans in his previous lending jobs here.

“Lynchburg just doesn’t have the low-income population that was in need of those type of loans,” he said.

Subprime lending was mortgage companies’ bread and butter for a while. But it became their downfall, Woolridge said.

“It wasn’t because of any wrongdoing. We weren’t doing anything that dozens of other companies were not doing,” he said.

Woolridge pointed out that some homeowners with subprime mortgages have managed to keep their homes. In his current job at Mason Dixon Funding in Lynchburg, he is helping a few people refinance subprime loans.

Melissa Yuille, senior housing counselor for Lynchburg Community Action Group, sees the other end of subprime and the damage those loans have done.

“We have clients who have mortgages they never should have gotten,” Yuille said. “Most of them were subprime loans.”

She and Clark Jefferson, another counselor for the nonprofit agency, have helped more than 60 homeowners since this spring try to get out of foreclosure before losing their homes.

Their clients had missed mortgage payments for a variety of reasons. Jefferson said some had lost jobs. Some had taken on extra debt for cars or furniture.

Spiking interest rates on adjustable rate mortgages caught some of the homeowners Jefferson and Yuille have helped.

In those mortgages, the interest rate resets two to three years after the loan is given, and every several months afterward. The new rate usually is based on the London InterBank Offered Rate, which rose sharply beginning in 2004, according to data from mortgage company Fannie Mae.

Yuille said she has seen some clients’ payments go from $800 to $1,200 a month after the interest rate changed.

“And who has an extra $400 lying around?” Jefferson said.

Of the 211 Lynchburg-area foreclosures taking place from January through August, 36 had already had an interest rate adjustment. About 17 had their first adjustment less than a year before foreclosure.

Jefferson said that the homeowners facing foreclosure come from many walks of life. “You’re looking at the typical American family,” he said.

There’s “no rhyme or reason in terms of the areas” where foreclosures are happening, he said. “It’s pretty much happening all over.”

For example, this year there were five foreclosures on Early Street, in the Daniels Hill area of Lynchburg, where the median household income is $22,000, according to U.S. Census data. There also were 18 foreclosures in and near Forest in Bedford County, including several homes valued at $150,000 or more.

“I’ve had a surprising amount in the upper-price ranges around (Smith Mountain) lake and the Forest area, some of the nicer homes,” said Bonnie Hall, a Roanoke-based real estate agent who deals only with foreclosures.

One of those was the home on Easy Street in Moneta. With a backyard facing Smith Mountain Lake, the home was appraised by the county at $1.2 million.

Cameron Jordan, the real estate agent who now owns that house, said the former owner was the contractor who built the home, then refinanced it in 2006.

After the owners defaulted, a foreclosure auction was held in April. M&T Bank took the house.

The home went on the market on July 4. Jordan immediately made an offer, and bought the house for $765,000.

“I bought it with the hope that I can get my own house sold and move into it,” Jordan said. That has not happened yet.

His second child was born this summer, and Jordan and his wife Angie were looking for a home with more bedrooms.

The idea of living in a house that someone else lost doesn’t bother Jordan. He said that the default and foreclosure happened months before he got involved.

Also, getting a foreclosure off the market could help other homes to sell by decreasing competition, he said.

Jordan and his wife hope to eventually buy vacant land along the lake and build their dream house. For now, though, he thinks his children will enjoy growing up in this home.

“I know that, number one, it’s a real good deal and it’s a really nice house,” Jordan said. “I’m looking forward to living there.”

“It’s nice enough that we’d be happy living in it forever.”

The Steps to Foreclosure

Once a homeowner misses a mortgage payment, the house can end up being sold at a foreclosure auction unless the owner catches up on payments. Here are some steps along the way after the first missed payment:

17 days

The lender charges a late fee and starts sending collection letters.

37 days

The lender sends borrower a letter stating that a breach has occurred. Phone calls and letters continue.

62 days

With three payments being past due, the loan enters a 10-day loss mitigation period. The lender aggressively tries to contact the borrower and discuss working out the debt.

72 days

- If the borrower cannot be reached to work out the debt, the loan is referred to an attorney and the foreclosure process begins.

- Lawyer gives borrower 30-days notice of foreclosure.

Foreclosure sale is advertised in newspaper for two consecutive weeks.

*117 days

The home is auctioned, usually at the circuit courthouse for the city or county. The lender sets a minimum bid and takes the house onto its books if the bid is not met.

* Virginia law delays the auction an additional 30 days if the loan was a subprime loan, giving borrowers more time to resolve the debt.

SOURCE: Virginia Foreclosure Task Force