In with little to lose -- but the house
Two years ago, Patricia Prado worried that she would never be able to buy a house.
Property values in this Central Coast farm town had been rising sharply, and Prado and her husband were burdened by $18,000 in debt from their credit cards and the loan on their Jeep Grand Cherokee.
Prado remembers expressing worry about her situation to co-workers at the food processing plant where she works. A few days later, she got a phone call from a mortgage broker who said she had heard her tale and had a solution: a mortgage loan that required no money down.
“She made everything sound like it was going to be wonderful,” said Prado, 38.
A few weeks later, Prado bought a $412,000 house with a so-called 80/20 mortgage. Those mortgages are actually a pair of loans -- one for 80% of the purchase price and another for the remaining 20%.
As home values soared a few years ago, these 80/20 loans were the only way many people could afford to buy a home. Some studies suggest they may even have constituted the majority of new mortgages in California in recent years.
The loans can make sense when property values are rising, enabling people to buy a home without having to spend years saving for a big down payment.
“In some places, where house prices were running up 20% year over year, you only needed one year of that run-up for the package to become well-collateralized,” said Stuart Gabriel, a UCLA real estate finance expert.
“All of that was predicated entirely on the presumption, the expectation, of a continued significant house price run-up,” Gabriel said.
Property values, of course, began falling sharply last year. And that left people such as Prado, who bought near the top of the market, owing more in loans than their homes were worth. Her home is set to be sold in a foreclosure auction next week.
Prado tells her story without a trace of self-pity and only a bit of blame for the mortgage broker who she says gave her a hard sell.
She acknowledged that she stated her monthly income as $7,500 on the loan application -- nearly double what she was actually earning in her job as a clerk at a food processing company and a second part-time job.
Still, she was confident the payments would not be a problem. At the time, her husband (who declined to be interviewed for this story) was earning $20 an hour as a carpenter as builders turned the area’s broccoli fields into housing developments.
In April 2006, the couple and their two children moved into the three-bedroom, 1,200-square-foot house in a neighborhood of 1960s-era ranch houses.
For a few months, it was wonderful, she said. But by year’s end, home values had flattened out, and then began dropping.
That meant Prado would not be able draw on rising equity to refinance her mortgage, as so many planned to do during the real estate boom. As home values plunged, new-home building slowed and her husband lost his job in 2007. Then this year, their monthly payment shot up by $450 to $2,650 as a higher interest rate kicked in, Prado said.
With their income down after her husband’s layoff, Prado said they made their last three house payments with a credit card. In February, they stopped payments altogether.
The family was far from alone. Shaky mortgages issued at the height of the real estate boom, combined with plunging home values, led to a 214% rise in foreclosures in Santa Maria in April compared with the same month in 2007, according to DataQuick Information Systems, a real estate research firm.
More than 1,000 homes in this town famous for its tri-tip barbecue fare have been repossessed by lenders or have mortgages in default, according to ForeclosureRadar, a company that sells default data.
Bunny Maxim, a Santa Maria real estate broker for 25 years, thinks the lesson for home buyers is to be conservative. She tells clients not to buy more house than they can afford and to steer clear of loans with low teaser rates that escalate to levels they cannot afford.
“There’s nothing wrong with that fixed-rate payment that’s going to be the same thing for 30 years,” Maxim said. “Building equity is a good thing.”
Financially, Prado says she hasn’t really lost anything, since she put no money down to get her mortgage. She’s looking for a place to rent.
Houses like hers are now renting for between $1,300 to $1,600 a month, Prado said. With the family income down because of her husband’s unemployment, Prado said, even that amount is a stretch. She’s trying to find something for about $1,000, and the family may go back to living in an apartment.
Her biggest challenge, she said, was trying to keep her children, a 10-year-old boy and 7-year-old girl, from figuring out what happened.
“They pick up on a lot of what’s going on,” she said. “They say, ‘Why are you fighting with Dad? Why are we moving; we already have a house?’ ”
To soften the blow to the children, Prado said she told them that they were only renting the home they had bought.
In many ways, that’s true.
THE FORECLOSURE FRONT
Reporter Peter Hong and photojournalist Brent Foster drove across California to see how home foreclosures
were playing out in various communities. For the complete series, go to www.latimes.com/foreclosurefront.
A Coachella Valley couple rode the real estate boom and is struggling in the bust.
How foreclosures hit a community at ground zero in the housing downturn.
A Napa County homeowner blames mortgage fraud for her foreclosure.
A Santa Maria couple learn the downside of buying with no money down.