It's their default position

By David Streitfeld, Times Staff Writer

HERE'S what Dave Hennigan knows about the four-bedroom house tucked away on a tranquil Corona street: The owner is a woman, and she's $8,155 behind on her mortgage payments.

Maybe she had a messy divorce or expensive illness. Maybe she has been spending too much and saving too little. Hennigan, a 45-year-old Riverside County real estate agent, doesn't plan to ask.

As he navigates the suburban streets, map in hand, he rehearses his pitch. "Your name came up on a list of people who might be interested in selling their house."

That sounds neutral, even sympathetic. If it works, he'll have his first distressed seller.

There's a lot of speculation about where the housing market is headed. Some analysts contend the shakeout is already over. Others maintain it hasn't even begun.

Hennigan and the company he works for, Home Center Realty, don't have the luxury of waiting to see how the story will play out. They need to make a living now, and they're betting that things are going to get worse. Maybe much worse.

During the four-year boom that ended last summer, Home Center expanded from 15 agents to 80 in three offices. The roster of agents has since sunk to 52, only about half of whom are active.

"The rest are looking for side jobs at McDonald's," said Home Center President Jason Bosch. "It happened overnight."

Hennigan works in the Norco office, a small building set on a hill off Interstate 15. He's been full-time since August 2005, when he quit his job as a route salesman for Peet's coffee. He gets a salary to help run the place, but to pay his own mortgage he still needs to earn commissions buying and selling houses.

In this queasy market, sales are slumping. Sellers remember the boom and want more money than they can get, while buyers feel they have unlimited time to make a decision. An agent's best prospect for a sale is someone who must act now -- a homeowner told by a lender to pay up or get out.

These owners are in crisis. They need to refinance if they can or sell and move into something affordable. If they had an easier option, they wouldn't be behind in their payments in the first place.

Home Center Chief Executive Ron Barnard says that personally, he finds foreclosure sad, even tragic. "But as a business owner, I think it's great."

The new issue of the company's 22-page listings magazine, distributed outside supermarkets and drugstores, will tout nothing but distressed and foreclosed properties: 95 of them, many nearly new, each priced at around $250,000.

"When you throw out the words 'foreclosure,' 'short sale,' 'repo,' the buyer thinks it's a deal," said president Bosch. "It's still very early, but I'm convinced that's where the market is going."

FOR Hennigan, the search for a deal restarts every 10 days, when he gets a packet from United Title Co.

Drawn from public data, it has the names, addresses and loan information for people in Riverside County who are in default, which usually means about three months behind. They generally have another three months before the bank seizes the house.

"They get sold these houses on the idea that they can handle the mortgage, and then they can't," Hennigan said in his cubicle early one afternoon. He glanced at the sheets and reeled off some of the amounts due: $13,708 ... $5,209 ... $12,776 ... $15,149.

When he combs through the listings, Hennigan ignores anyone who owes more on a home than it is worth. These folks are in too much trouble to be saved. What he's looking for are owners who, after closing costs and a 6% agent's commission (half to Hennigan, half to the buyer's agent), will walk away with their credit rating intact and some cash to start anew. This will give them an incentive to deal.

He likes to pay his unannounced visits late in the afternoon, betting that the wife will be home and the husband not. "I can't remember the last time a man said, 'Let's sit down and talk,' " Hennigan said.

Coming along on this afternoon's prospecting trip is Jerald Becerra, a former body-shop estimator for insurance companies who became a full-time agent in August. "I'll stay in the car, keep the engine running," he says. "Just in case someone comes out with a shotgun."

When they reach their target house, they don't approach it immediately. Instead, they warm up with the neighbors. Maybe they're also broke. "It's Dave from Home Center Realty," Hennigan shouts at a woman he glimpses behind the drapes. She instantly retreats into the recesses of the house.

He leaves a flier he developed when prices were zooming upward. "Are you a first time buyer?" it asks. "Are you looking to refinance? Are you looking for that 2nd or 3rd home?"

In October, he added a fourth line: "Maybe you are in notice of default or foreclosure!"

The target home was built in 1988. The owner refinanced two years ago, bringing the mortgage up to $327,000. Based on comparable recent sales, even in this lousy market the house could go for as much as $500,000.

Hennigan walks up as Becerra hangs back. Someone is surely home. An upstairs window is wide open. A white Honda is crookedly parked in the driveway. Yet no one answers. It's frustrating. You can't help someone who's hiding.

This neighborhood is a bust. But there are so many others.


A DECADE ago, the Inland Empire was one of the foreclosure capitals of California. The area thrived in the late 1980s as refugees from L.A. and Orange counties arrived in search of cheap housing. Then the recession hit. Values cratered and owners bailed.

Smart agents could make a good living finding buyers for these houses, which often went for 30% under market value. That was how the two executives running Home Center got their start. Bosch, 31, grew up in Victorville and was an apprentice loan officer at 17. Barnard, 55, is the son of real estate agents in Whittier who began by buying and rehabbing foreclosures for a profit.

Despite working side by side the last few years, they have sharply different views about where the market is going.

Barnard, who bought five houses around the county as investments shortly before the market peaked, is the optimist. His argument: Population continues to rise, which means demand won't slacken. Builders have switched to making smaller homes, which are more affordable.

"A lot of people are sitting on the sidelines," Barnard says, "but in the middle of summer they'll come back."

Unless they don't, which is why he's encouraging his agents to learn everything they can about foreclosures.

Bosch, on the other hand, thinks the residential real estate market will soon revisit the horrible days of the mid-'90s -- and then get worse.

"I have no doubt that we are entering the next phase of an unprecedented market," he says. "One that Southern California has never seen."

Sure, there's been employment growth in the area. But much of it, Bosch argues, was related to real estate: construction, lending, appraising, title search, termite inspection, pool building, etc. This was a boom that fed upon itself.

The biggest problem, Bosch believes, was created by the lenders. They used to be cautious. They'd want the borrower's tax returns, pay stubs and bank statements, and it would all have to match up. The borrower would make three times his monthly payment. He'd have to scrape together a down payment.

Sub-prime loans changed all this. Originally these high-interest loans for credit-challenged buyers were a small segment of the market. But as houses got more expensive, fewer buyers qualified under the traditional guidelines, so they went sub-prime.

Lenders would take their word on income. They no longer needed down payments. They didn't worry that their loans would soon reset to higher interest payments.

Nobody cared too much as long as prices went up, although many people in the business knew the day of reckoning wasn't canceled but merely postponed.

"To make a living, you had to push a product you didn't believe in," said Aimee Quigley, a Home Center mortgage broker. "It was like being a defense attorney where you know your client did it, but you have to say he didn't."

Quigley says she tried to emphasize how quickly these loans would adjust, causing payments to balloon, but the message rarely got through.

"Nine out of ten times when these loans closed, we would sit there and say, 'How long can they hold it together?' "

Now the initial wave of those who can't hold it together need to do something, but Quigley can't help them. Some sub-prime lenders have gone out of business; other banks have tightened their standards. Money isn't free anymore.

In Home Center's near-vacant Ontario office, Raul Palma shuts himself into his windowless office. A 32-year-old former lineman for Southern California Edison, he became an agent a year ago for the same reason the rest of them do: "It's all about the money."

He looks at his "motivation board" on the back of the door -- pictures of luxury homes, luxury cars, luxury vacations. Then he starts playing instructional CDs on his computer. They've been rewritten for the housing downturn, offering blunt and occasionally harsh suggestions for Palma to repeat to reluctant clients.

Did you know the market is no longer appreciating? the disembodied salesman intones with Baroque music in the background.

Palma dials one number after another from a list of houses being sold by their owners. He only occasionally connects with a live human being, who generally hangs up on him.

Have you received ridiculous verbal low-ball offers?

The market, Palma explains between calls, is driving many people crazy. "Some are very distressed. A lot of them are."

Are you familiar with the definition of insanity? It's doing the same thing over and over and expecting a different result.

Jackpot. A man agrees to let Palma come over tomorrow evening. He's been trying to sell his house for $375,000. If Palma has his way, it will be cheaper.

"To get top dollar in today's market, you have to have the cheapest house for sale in the neighborhood," the agent says. "The way prices are falling, in three weeks it will be the most expensive."


THAT'S one way markets drift south. Another is through short sales. That's when homes in default are sold for less than what is owed on them. The bank agrees to waive the remainder in the interest of bringing the whole mess to a speedy conclusion.

The trouble is, most people in this situation have two loans. The primary lender has first claim to the money. As a result, the second lender is often unwilling to deal.

Hennigan had a Rancho Cucamonga default fall into his lap. The house had two mortgages totaling $460,000. Hennigan found a buyer who would pay $415,000, enough to cover the first loan but not the second. The first lender agreed to the sale. The second wouldn't respond, despite the agent's daily calls.

A frustrated Hennigan finally asked, "Why is this taking so long?"

"We're getting a thousand calls like this a week," the receptionist said.

Hennigan finally realized that the company he was fruitlessly calling didn't actually hold the second mortgage on the house. It was just a middleman, collecting the mortgage payments for a fee. The loans had been repackaged and sold to Wall Street investors as mortgage-backed securities. They were someone else's problem.

Without the permission of both lenders, Hennigan's client couldn't buy the house. Instead, it went to auction, fetching $375,000.

That might have been a bargain for the buyer but it pushed down values for everyone else in the neighborhood -- the reverse of what happened during the boom.

Another loser was the owner of the second loan. This investor, whoever it was, was out $85,000. "Banks don't have enough bad loans on their books to say, 'We've got to deal with this,' " Hennigan said. "Within six months, that will change."

Maybe sooner. Home Center agents have 73 homes on the market. Fourteen are being sold in a short sale, with the bank asked to swallow the difference.

If Hennigan barely knew what a default was in September, if he spent December knocking on doors failing to persuade those over their heads to let him help, now the business is coming to him.

Lenders are calling, asking him to photograph houses and evaluate their condition and marketability.

The first two were in Perris. By the time he goes to the third one, in Fontana, he knows what to expect. No point knocking on the door. This house, like the others, is empty. The electricity is off, the grass brown.

It's a foreclosure, something flush times early this decade had pushed to the brink of extinction. In December 2004, there were about 12 foreclosures a week in Riverside and San Bernardino counties. In December 2006, there were 123.

He doesn't have a key, but the back door is open. The carpets are stained, the living room wall has a hole punched in it, and the bedroom doors are missing. Still, it's a solid house. The lender will use Hennigan's report to set a price and then turn it over to the agent to find a buyer. A little paint, a little plaster and it will go for $500,000.

Hennigan doesn't know who the owners were, why they couldn't pay or where they went. It's much better this way. He doesn't have to feel sorry for anyone. Instead, he can concentrate on work.

"People are walking away from their houses," he says. "I'm giddy because I'm going to be so busy."