Robert and Herlinda Krost have not made a mortgage payment in three years on the California ranch-style home they bought six years ago adjoining a golf course.
The mortgage company, California Federal Savings & Loan Assn., has not tried to foreclose on the couple--or against about two dozen other homeowners in the area who also have stopped making house payments.
The Krosts and the other homeowners are embroiled in a years-long legal battle with the developers and lenders they believe are responsible for turning their brownish-colored homes into "beige elephants."
They are among 45 homeowners who jointly filed a $250-million lawsuit in 1984 against the Woodward Cos., Brentwood Savings & Loan Assn., Aetna Capital Co., California Federal Savings & Loan Assn. and Gary Larson, a real estate agent who sold many of the homes, for alleged misrepresentations. Larson could not be reached for comment.
'Working for a Solution'
"If my house is going down in value I need a way of recovering my losses resulting from a situation created by Cal Fed and Aetna Capital," asserted Jim Ragon,41, a clothing store executive who bought a new home here in 1981. His monthly mortgage payments were about $1,400.
"We are really working for a solution to this," said Philbert E. Seals, senior vice president and general counsel of California Federal, "but I am not sure the homeowners or their counsel are looking for a resolution."
The Krosts bought their home in 1981, when interest rates were soaring above 16%, under a creative finance plan that enabled them to purchase the $107,000 house and lease the $35,000 lot it sat on.
The arrangement, which also gave them an option to buy the lot after two years, shaved a chunk off their down payment and reduced mortgage payments.
They said they were told that additional housing of similar cost and quality would soon be built in the area and their property would increase in value as result, which would make it easy to refinance and buy the lot when the option came up.
'A Heck of a Deal'
"It seemed like a heck of a deal," Herlinda Krost, 35, recalled.
The homes were built in a joint venture between Woodward Cos., the builder; Brentwood Savings, which financed construction, and Aetna Capital, a subsidiary of Brentwood Savings that held title to the land, said Allen Shugar, the attorney representing the homeowners.
Although four phases of housing were originally scheduled for the community called Country Club Homes, adjoining Indian Hills Country Club, located about five miles northwest of downtown Riverside, only the first two phases were ever completed, Shugar said. These homes went up for sale in 1981.
To facilitate sales at a time of skyrocketing interest rates, the developers came up with the plan to sell the houses and lease the lots.
After two years, the homeowners received the option to buy their lot. There was good reason to do this. Lease payments were on an escalating scale that started at $100 a month for two years, then rose to $348 a month for three to 15 years, and $1,914 a month and higher after 15 years.
Sold Undeveloped Lots
The residents claim they were told by real estate agents acting on behalf of the developers that they could buy their lots when the time came, by procuring a new loan--at no extra cost except for nominal appraisal and escrow fees, Shugar said.
But Phases 3 and 4 of the original development never came. In 1983, California Federal bought Brentwood Savings and Aetna, and then sold the undeveloped lots to another home builder, Fredericks Development Corp., for $2.6 million, Seals said.
Fredericks decided to build smaller, less expensive homes of a "Cape Cod" design. These were offered for between $80,000 and $120,000, including the lots.
Local residents subsequently lost a court fight to stop the Fredericks plan on grounds it would depress the value of their homes. Fredericks' attorneys argue that,, among other things, the Country Club homes were overbuilt for the area.
Seals defended the sale to Fredericks and the addition of smaller homes in the area by saying, "I don't know what promises were made (regarding Phases 3 and 4) . . . but it seems economically unjust to build homes that there is no market value for."
Not Sufficient Appreciation
Meanwhile, in 1983, some residents who tried to refinance their homes to buy their lots were turned down because their property had not appreciated enough to warrant making a new loan, Shugar said. Others were told they would be "charged loan origination fees and points far in excess of the nominal appraisal," he said.
As result, some homeowners balked at making mortgage payments. "About 25 homeowners have not made mortgage payments in one to three years," Shugar said.
In an agreement with Shugar, California Federal agreed not to foreclose pending resolution of the problem.
Seals insisted that the residents do not "have a legitimate complaint against Cal Fed."
Nonetheless, "we are trying to work with the homeowners in that tract, so as to afford them financing in an amount that would be sufficient to pay off their existing loans and to assist them in buying the land their homes are situated on," Seals said.
"Baloney," said Shugar. "Refinancing would barely pay off the existing loan."
"If need be, we will walk," added Jim Ragon's wife, Jan, "and they will be stuck with 45 empty homes."
Said one appraiser familiar with the property in question: "Buyer beware. Implied guarantees are garbage unless they are written into the contract."