Admittedly, this story from the Washington Post is largely anecdotal. But I am passing it along because it is an indicator of how widespread housing stress is. Remember, unemployment is still low, and normally defaults move up and down with overall employment. The sources in this article attribute the increase in mortgage defaults and foreclosures to subprime lending. In some areas, the level of foreclosure and abandonment has gotten so high that it is undermining the local tax base. Even though the Washington DC area is viewed as recession resistant, the distress is affecting affluent suburbs.
From the Washington Post:
Tommy Rice, Arlington County’s real estate assessor, spotted something troubling on his computer when he returned to work after a three-week vacation early this year: a half-dozen residential property transactions with an unusual code, the numeral 1, which indicates a foreclosure.
Rice was taken aback, because he had seen that code so infrequently in his 22 years as an assessor in the affluent county.
“It’s rare in Arlington and in Northern Virginia, too,” he said.
Home repossessions are cropping up almost everywhere in the region, regularly occurring on suburban streets unaccustomed to hard times. In Montgomery County, the foreclosure rate has tripled in a year. In Fairfax County, it has quadrupled. In Loudoun County, it has increased tenfold. In Howard County, there was one foreclosure in 2004; there are 157 so far this year. District officials are reporting a similar trend.
“We’re seeing an uptick, and it’s fairly dramatic. It appears to be accelerating, and we haven’t reached the peak,” said John Rust, commissioner of accounts for the Fairfax County Circuit Court. He processes paperwork for foreclosures, a legal proceeding that occurs when a lender takes back a home to sell when a homeowner falls behind on payments.
Foreclosures normally come amid economic downturns, when people lose manufacturing jobs or when regions are devastated by a natural disaster.
The surge in foreclosures, in relatively good times, can be traced to risky, so-called subprime mortgage loans made to people who stretched too far to purchase homes in an inflated real estate market.
In many cases, lenders loosened credit rules for home buyers with bad credit, who made no down payment or who didn’t earn enough money to qualify for traditional loans. The lenders charged them higher interest rates, which made the loans more expensive.
The two hardest-hit Zip codes in the region are in Herndon, where 75 homes went into foreclosure in the first five months of the year, up from nine during the same period in 2006, and Fort Washington, where 80 properties were lost to the lender from January through May, double the previous year’s five-month rate, according to a real estate information firm, Realtytrak, which studies foreclosures nationally.
Some of the home buyers took these loans knowingly, but others say that they didn’t understand that these new and unconventional mortgages were profoundly different from traditional loans and that their payments could double or even triple in a single month.
Bolivian immigrants Marcelo Ortega, a dump truck driver, and his wife, Jenny, who cleans houses, bought a brick-front Colonial in Herndon for $549,000 in February 2006. The payments are $4,200 a month, which grew unbearable as residential construction work slowed and Ortega’s income dropped.
The couple tried to sell the house, but the value has fallen to $499,000, and they can’t refinance without paying a steep prepayment penalty, something Ortega says they did not know or understand.
Their home is being advertised by the lender as a pending foreclosure.
“My wife loves this house,” he said. “But we can’t pay for this house. We need to find something less.”
The Ripple Effect
Neighbors greet the news of an impending foreclosure with trepidation mixed with compassion. They are often aware that the family is under financial pressure, something to which they can relate. Steve Courtnemanch, who lives in a townhouse on Gunners Place in Centreville, said he hadn’t really understood that his 6.5 percent interest-only loan was going to readjust to 10 percent, which would have meant a steep payment hike. He refinanced the loan and got himself out of the squeeze, but it made him more sympathetic to the neighbors a few doors down who are losing their townhouse to foreclosure.
Sitting in his front yard on a recent sunny afternoon, Emery St. Clair tallied on his fingers seven or eight recent foreclosures that have occurred in the middle-class, 1950s-era subdivision in Manassas where he has lived for 44 years. The houses, with a median value of about $300,000 — down 14 percent from a year ago — fell into disrepair, and people started renting out rooms to stay afloat. But they still couldn’t keep up with the payments.
“A lot of people bought these houses way too high, and they’re going that way,” St. Clair said, shaking his head. “People can’t afford to stay in them any more.”
If foreclosures multiply in a neighborhood, with lenders eager to dump properties for a quick sale, home prices can be depressed. The drop in prices can pull down tax assessments, giving local governments less money to pay for schools, police, parks and social services.
So far, the Washington area has been less affected by the foreclosure surge than some other parts of the country, such as Colorado, Nevada, Florida, Michigan and Ohio. The total number of advertised foreclosures in the region — 2,686 in the first five months of the year, more than double the amount in the same period in 2006, according to Realtytrak — are dwarfed by the total number of regular sales. In the region, 25,683 homes changed hands in traditional sales in those five months, according to the Metropolitan Regional Information Systems.
The increase in foreclosures is nevertheless a cause for concern for government officials in both Maryland and Virginia.
Maryland Gov. Martin O’Malley (D) recently announced a $111 million loan commitment effort to help home owners facing foreclosure and created a task force to study ways to prevent the abusive loan practices that can lead to mortgage delinquencies.
“Real estate tax income is our highest source of revenue to provide county services,” said Fairfax Supervisor Sharon S. Bulova (D-Braddock), who chairs the budget committee. “Our budget is comprised almost 60 percent from real estate taxes. . . . We are watching very carefully, as we are affected very definitely by what happens in the real estate market.”
The costs of foreclosure can be steep: For each abandoned house, a city can lose up to $20,000 in unpaid taxes and utility bills and for upkeep and maintaining essential services, according to a report by the Joint Economic Committee of the U.S. Senate. Another study cited by the committee reported that home prices fall about 1 percent for each foreclosure that occurred nearby.
The first effects of a foreclosure are cosmetic, as many Washington area residents are starting to learn. People facing foreclosure typically lack the time or money to maintain their homes, and then end up abandoning them. Torn screens are not replaced, the grass goes uncut, yards turn to weeds.
Homes that go into foreclosure often linger in limbo as slow-moving bank bureaucracies first handle the paperwork on the transaction before taking responsibility for the property itself. Often a house is left unattended, perhaps vacant, for six months or more, said Lance Young, a Washington area foreclosure specialist.
“The foreclosure is almost always going to be the worst-looking house on the street,” he said. “They sort of give up on the house, and it shows. It’s not in line with other houses where there is obvious pride of ownership. If they have a few dollars, they don’t spend it fixing the roof but keeping the mortgage up. Generally, the owners have had financial difficulties for some time.”
The Price of Abandonment
Home abandonment is not uncommon in foreclosures, because if people paid more for a house than it is now worth, or if they made only a small down payment, they can find themselves with a mortgage higher than the value of the home, making it almost impossible to sell at a profit or even to break even on the transaction expenses.
The grass is three feet high now at a foreclosed townhouse on New Braddock Road in Centreville, a property surrounded by neatly maintained homes with rose bushes in their yards. Dead flowers drooped in untended planters; wind-borne trash had gathered at the front door.
For Joy Loesel, a mother of two who owns a townhouse a few doors away, this foreclosure, after others nearby, was the final straw, and she and her husband decided to sell.
“We thought we would stay, but then there was a forced sale here and a forced sale there,” she said. “It’s not a good community if everything is foreclosed. I can’t wait to get out.”
Shadi Benze, who lives in the well-manicured Hadley Farms subdivision near Olney, is equally frustrated by a deteriorating property next door to her single-family home. It was owned by a paving contractor married to a school secretary, and the family abruptly moved away one morning without saying good-bye, leaving the yard untended and construction materials in piles in the back yard. A for-sale sign has been in the front yard for months, and public records indicate the house is going into foreclosure.
“It’s disgusting,” Benze said. “It would take 30 minutes to clean it up. I say, why keep this junk if they are trying to sell the house?”
Neighbors sometimes end up taking matters into their own hands. One financially struggling single mother who lived in a townhouse in Centreville was cited repeatedly by the homeowners association for failing to paint her home and repair a broken screen. One day in March, she disappeared after telling neighbors Velma Powell and her husband John that she was moving back to her home country because she couldn’t afford to live in Centreville. John Powell has been mowing her lawn and tending her yard ever since.
“It’s like they are missing in action or something,” Velma Powell said.
Frequently, homes entering foreclosure have been converted into rentals as owners try to find a way to help cover the mortgage. That is a good option for some owners, but in the worst cases, former family homes are turned into transient lodging.
Five unrelated people are living in a house facing foreclosure in Manassas. One of the tenants, Cristian Mendes, from El Salvador, said that the owner, who lives in the house, is losing it to the bank because his boarders have lost their construction jobs and can no longer pay rent.
“I’ve been here four months, but I’m looking for another place to go — I have to,” Mendes said in Spanish. “I’ll be on the road.”
The door to the front of the house was propped open with a rope attached to the front railing to signify it would accept anyone passing by who wanted to rent a room. Tenants wandering in off the streets have plenty of options in Manassas: At the Global Foods grocery nearby, there were more than 35 handwritten fliers, most in Spanish, offering rooms to rent in homes.
“It’s creating a whole subculture of boarding rooms,” said Jose Luis Semidey, a Tysons Corner mortgage broker and real estate agent.
The Senate Banking Committee has been told that 2.2 million families nationwide face foreclosure as a result of loans they can’t pay. Many home repossessions are expected to occur within the next two years as attractive low-interest “teaser” rates expire and mortgages adjust to reflect higher payments.
“Everybody in the industry knew what was coming when you start loosening the criteria for making loans, allowing anybody to get a loan for anything,” said Beau Brincefield, an Alexandria real estate lawyer. “Sooner or later, the chickens come home to roost.”