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September, 2006 Blog

Forensic Appraisal Aurora Colorado

by: Philip G Rice, Certified Residential Appraiser, CPA, MBA

Article in the Denver Post - page 1 top story, Sunday September 17th, 2006. Headline = No money down: a high risk gamble. Foreclosing on the American Dream. Part of an occasional series. By Gregg Griffin, David Olinger and Jeffrey A Roberts.

Monique Armijo, who is pregnant with her fourth child, and her husband bought their $220,000 Jefferson County home with nothing down and are now facing foreclosure. (Post / Cyrus McCrimmon)

Monique Armijo expects to give birth to her fourth child, a girl, next month. She also expects to lose the house her family moved into just last year at an October foreclosure sale in Jefferson County.

She cannot bear to tell her three children, two 7-year-old boys and a 5-year-old girl, about the auction.

"When we moved in, I told them, 'We're never going to move again; this is where we'll stay,"' she said. "I love this neighborhood."

Monique and her husband, Anthony, are among the many Colorado residents who managed to acquire a house without a down payment, only to see it foreclosed on a year or two later.

Anthony, an independent carpet installer, met a real estate agent who assured the couple that shaky credit and lack of cash for a down payment were no longer barriers to homeownership. They ended up signing a loan that required them to pay off a $44,000 second mortgage in 14 months.

Once rare in the mortgage industry, nothing-down loans have become wildly popular in Colorado, where home prices rose rapidly during the late 1990s. And according to a computer-assisted Denver Post analysis, they are a leading cause of the state's foreclosure epidemic.

"Exotics" go mainstream

The Post examined nearly 1,000 foreclosures - every notice filed in August in three Colorado counties racked by troubled mortgages.

In Adams, Arapahoe and Jefferson counties, more than half of all foreclosures on home purchases involved no-down- payment loans. Excluding federally insured loans that require a small down payment, no-money-down loans accounted for more than 70 percent.

Nothing-down loans lead the list of higher-risk, alternative mortgages that many Coloradans are substituting for traditional 30-year fixed loans with at least 10 percent down. Buyers often compound their risk by combining 100 percent financing packages with interest-only loans, adjustable-rate loans that allow the borrower's debt to grow rather than decline and loans that require no proof of income.

These loans, known among lenders as "exotics," have moved from the fringes of the mortgage industry to the mainstream and now account for more than a third of all loans.

The growth has fulfilled a desire of lenders, borrowers and regulators alike to make homeownership accessible to more people. But the risks - some have relatively high monthly payments, while others start low and adjust rapidly upward - are more than many homeowners can manage.

In interviews with dozens of homeowners in foreclosure, The Post found that life events such as job loss, medical problems and divorce often precipitate a default. But lack of equity, which gives homeowners options when they face financial problems, was a factor in nearly all cases.

For the past six months, Colorado has had the highest foreclosure rate in the nation, according to RealtyTrac, a California firm that tracks foreclosures. Repossession proceedings were underway for one of every 158 Colorado homes during the second quarter.

It's no coincidence that Colorado homeowners have less equity in their properties, on a percentage basis, than nearly any other state - the result of a number of factors including the popularity of 100 percent financing.

"The bottom line is, people in Colorado are borrowing too much money on their homes," said Stuart Feldstein, president of SMR Research Corp., which tracks lending-industry trends.

Aggressive lending practices and poor consumer education also play a role, consumer advocates say.

"Seventy percent of the people who come in here got the wrong loan," said Zachary Urban, a counselor with Denver- based Brothers Redevelopment Inc., which helps people keep their homes.

Lenders say they're simply meeting customer demand for less restrictive loans.

"There are very few people who have 5 or 10 or 20 percent cash to put down. Or if they do, who want to," said Colorado Mortgage Lenders Association president Chris Holbert. "If you want 100 percent financing, and you qualify, can they turn you down because it's not a good idea?"

Many left second-guessing

Jose Garcia and Maria Vanderhorst put no money down in October when they bought a $200,000 patio home in a quiet central Aurora neighborhood.

Now fighting for their home as a foreclosure auction looms, the couple questions that decision.

"I had money to put down, but they came out with the idea of no money down. I did some research, and it looked good," Garcia said. "Maybe it wasn't the smartest decision."

Garcia and Vanderhorst, who immigrated to Colorado from the Dominican Republic in 2003, obtained what's called an "80-20" mortgage package.

One loan covered 80 percent of the purchase price, and the other covered 20 percent. The second loan carried a 9.7 percent interest rate - high, but not unusual for a second loan - and a monthly payment of $340, bringing the total to nearly $1,500.

The couple, who have three children - 13, 11 and 5 - used their savings to finish their basement and send money to their parents.

But Garcia, a car salesman, took a big pay cut in March when his dealership was bought out by a competitor. The family also didn't receive an expected tax refund and faced some unexpected medical bills.

Behind on their payments, they received a foreclosure notice from their bank in June.

Garcia negotiated a deal with the current mortgage holder, Countrywide Home Loans, giving him eight months to pay the $7,000 he owes, including a $2,200 foreclosure fee.

With some belt-tightening, he thinks the family can keep the house.

"When we went into foreclosure, it was like someone taking my dreams away," Garcia said. "There was no way I was going to lose my house. It's about pride."

The future is bleaker for Monique and Anthony Armijo. Their two loans came with a high interest rate and some unusual terms.

Spectrum Funding, a Utah-based lender, supplied the $176,000 first mortgage toward the $220,000 purchase of a middle-class home in Arvada. Ad Two Inc., the company selling the house, provided the $44,000 second mortgage.

The first started at 9.67 percent - more than $1,400 a month in interest alone - and can jump 3 percent after two years. The second let the Armijos pay just $100 a month for a year - but required them to pay the entire balance in January 2007. They could refinance that loan but faced a $20,000 penalty if they didn't use a particular broker.

The Armijos' sole source of income: about $30,000 a year from Anthony's carpet work. Within months, they were behind on the first mortgage.

Ad Two Inc. is an independent franchise of HomeVestors, which buys, repairs and resells houses. Terri Gallmeier, Ad Two's president, said the Armijos' real estate agent asked her to carry a second mortgage that could be refinanced a year later.

"I had nothing to do with the loan," she said, "and I wasn't privy to all the financial information" about the buyers.

The foreclosure notice that came to the Armijos' home was followed by a flood of mail from people offering everything from counseling to taking the house off their hands. Monique called one, Doug Ravdin, who explained the terms of their two home mortgage loans.

"He told me, 'You're going to be in debt for the rest of your life if you stay in that property.' He was like, 'The best thing for you guys to do is get out of the house."'

She thanked him, hung up and wept.

"We run into this all the time," Ravdin said. The Armijos bought a fix-and-flip house and "got loaded into it horribly, I mean horribly."

Housing counselors say borrowers need to be very careful when choosing a loan and to read the papers before signing.

"If it sounds too good to be true, then it probably is," said Don May, executive director of the Adams County Housing Authority. "The buyer has to be a lot more sophisticated and educated with all the mortgages available today."

Loans' door wide open

More choice and lower lending standards have made it easier than ever to buy a home, but has the trend gone too far?

The jury is still out. The U.S. rate of homeownership - the percentage of homes occupied by the owner - was 68.9 percent last year, up from 63.9 percent two decades ago, according to the Federal Deposit Insurance Corp.

But foreclosures rose 39 percent from January to July compared with the same period of 2005, RealtyTrac reports.

Beginning in the early 1980s, regulators allowed banks to sell their loans and offer homebuyers variable interest rates, stimulating capital investment and consumer demand.

Securitization of mortgages helped lenders get the riskiest loans off their books. Investors were shielded because those mortgages were typically held in diversified loan portfolios.

High-risk loans such as option-ARMs, in which payments on principal and some interest can be deferred, were introduced

by savings-and-loan associations in the 1980s to serve high-income borrowers. Only recently have they spread to less creditworthy consumers.

Since 2003, the height of the refinancing boom, competition has stiffened among lenders fighting for a declining number of loans.

Mainstream lenders and mortgage brokers say they've had to offer all of the alternative loans, at competitive terms, or risk losing business.

"If we don't do it, they will go down the street," said mortgage broker Mike Thomas of Hyperion Capital Group in Aurora.

Loans without down payments have been around for a long time, but they've taken off in the past three years.

In 2005, 43 percent of first- time homebuyers surveyed by the National Association of Realtors said they put no money down. Before last year, the group had never tracked that category.

A common choice is the 80-20 because it allows buyers to avoid the costly mortgage insurance typically required when they put down less than 20 percent.

Standard & Poor's reported in July that 80-20s and other two-loan packages known as "piggybacks" are up to 50 percent more likely to go into default than comparable one-loan transactions.

In Adams, Denver and Arapahoe counties, piggybacks were used in more than 50 percent of home purchases in the second quarter of 2006, well above the national average of less than 40 percent, according to Hackettstown, N.J.-based SMR Research.

As state housing prices doubled in the 1990s, homebuyers saw less need to invest their own money, said Holbert of the Colorado Mortgage Lenders Association. Equity accrued automatically.

Now, if homeowners put no money down and prices remain stagnant, "what other option than foreclosure do they have if their income drops and they can't make their payments?" Holbert said.

"The place was a mess"

Mark Williford says his house in Northglenn was unsafe from the day he moved in. Yet he managed to borrow more than 100 percent of the sale price in 2003 from a bank that threw in $33,000 for renovations and accepted his shaky finances.

Williford's only steady source of income: permanent disability checks from a 1993 neck injury. His mortgage was co-signed by a girlfriend he had never lived with before, and their loan application counted $809 a month in tips from her casino job as household income.

"Somehow we pulled it off," said Williford, a 47-year-old disabled plumber who obtained a $161,000 loan from Wells Fargo Home Mortgage Inc. on a house Northglenn later tagged as uninhabitable.

The city responded to a 2005 engineering report that a second-floor addition rests on decorative metal columns and its windows could shatter and fall out.

When Williford and his girlfriend split up months after moving in, his mortgage payments exceeded his total income. In October he lost his first home.

"I bought a condemned house, which is all I could afford," he said. "I was trying to save my house, my mortgage, my self-worth."

A mortgage expert said the bank should have known better.

"Bottom line, Wells Fargo should never have made the loan. The borrowers did not have the provable income and the property was unsafe," said Jim Spray, a consumer-oriented mortgage broker Williford called for help.

Dick Yoswa, the Wells Fargo loan officer, remembers "the place was a mess" when Williford bought it. "It was a borderline case," he said.

But Williford's disability income and his girlfriend's casino job were verifiable, a contractor estimated the house could be repaired for $33,000, and the appraiser sounded no alarms, Yoswa said.

"From the information we received from everyone, we closed the loan," he said.

Today, Williford lives in a tiny portable trailer with a refrigerator, stove, bunkbed and a flat-screen TV he squeezed in after dismantling the door. "It could be worse. I'm just grateful that I have this," he said.

Option-ARMs next wave?

Though 100 percent financing is involved in many Colorado foreclosures, the next wave of defaults may come from option-ARMs, experts say. Troubling stories about these loans are mounting.

Louis and India Harts of east Park Hill refinanced last year into a loan they thought was a 30-year fixed-rate mortgage.

But instead of a 30-year fixed, the couple in their 80s got an option-ARM with a low teaser rate of 2.6 percent that quickly shot up. They're making a minimal monthly payment of $919 on the $180,000 loan, but that doesn't even cover the interest. Since March 2005, the principal has grown to more than $183,000.

The interest rate is now 8.1 percent, and according to their loan documents, can go as high as 9.95 percent.

When the principal hits 115 percent of the original loan in a few years, the bank will force them to begin paying it off.

"I don't know how we're going to do it," said Louis, a retired worker for Public Service Co. of Colorado.

The loan has a "prepayment penalty" clause, making it difficult to sell or refinance during the first three years. When they called the lender, Countrywide Home Loans, they learned it would cost $11,000 to get out of the loan.

The Hartses blame their mortgage broker, Team Lending Concepts in Greenwood Village, for putting them into a loan they didn't understand - though they admit they signed papers spelling out the terms.

Team Lending president Jeff Lowrey said the loan was the best option for the Hartses because it guarantees a low payment for four to five years until they refinance again.

"That type of minimum- payment option definitely helps those kinds of people," Lowrey said. "We minimized their payment so they could afford things like medical expenses and gas."

Team Lending collected $3,900 in fees at closing and $4,200 more from the mortgage company for originating the loan. Lowrey said the fees are within the permissible range for such loans.

Option-ARMs and other adjustable-rate mortgages could fuel a surge in foreclosures in the next few years as adjustable rates begin moving up on billions of dollars in loans, consumer advocates and public officials warn.

"We are just starting to hear about ARMs," said Adams County trustee Jeannie Reeser. "That is what is going to drive foreclosures next year."

Staff writer Aldo Svaldi contributed to this report.

Staff writer Greg Griffin can be reached at 303-954-1241 or ggriffin@denverpost.com.

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