Refinancing to use a home's equity has put some in a perilous position

By BEN van der MEER
bvandermeer@modbee.com

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At Ann Salvi's Modesto home, there's always something going on.

Her adult children visit for boisterous dinners on weekends. The dogs dig up her attempts at a flower garden. And Salvi struggles to stay ahead of the endless chores and on top of the family's jam-packed schedule.

Like a dark cloud over everything, though, is the possibility that Salvi, 47, and her husband, Steve, 57, could lose the home they've lived in since 1992.

They fear their mortgage payments could spiral out of sight because they refinanced twice to use equity for family emergencies.

"Who's to say when the kids are going to get sick or things are going to be beyond your control?" said Salvi, explaining that she refinanced so she could stay home to care for a sick daughter, another one who was injured in a traffic accident and her grandchild.

The Salvis bought the home for $129,000, but when they refinanced four years ago to use some equity, it was appraised at $369,000. They refinanced again in 2005, this time with an adjustable rate, interest-only loan. In March, the rate will rise to 10 percent, and the mortgage will go from $2,500 a month to $3,000.

On her husband's wages as a machine operator in Newark, Salvi said, that'll be impossible to pay. Foreclosure is possible, though she admits they avoid discussing the topic.

Hundreds of homes repossessed

The Salvis are not alone. She and thousands of other homeowners in the Northern San Joaquin Valley are facing the prospect of losing their homes as foreclosures soar to historic levels.

The region's three counties -- Stanislaus, Merced and San Joaquin -- have the highest foreclosure rates in the country. In September alone, 268 homes were repossessed by lenders at foreclosure auctions outside the Stanislaus County Superior Court, according to ForeclosureRadar.com.

Some homeowners, such as Salvi, have adjustable rate loans that are about to reset and send payments skyrocketing. Others opted for creative financing that didn't require any money down, no proof of income and came with low initial teaser rates. Some went with loans that allowed interest-only payments and negative amortization.

Experts say significantly more subprime loans were used in the valley to get people into homes as prices took off.

And those who refinanced repeatedly to use equity to pay off credit cards, buy cars and put in swimming pools often did so with exotic financing.

Once the market started to head south in fall 2005, the appreciation stopped, and homeowners couldn't refinance to avoid rising mortgage rates.

As homes piled up on the market, experts say, owners couldn't get out by selling. The glut sent prices plunging, leaving many homeowners with houses that were worth far less than what they owed on them.

Although some people are just walking away from homes in which they have little or no equity, and others await foreclosure, experts said there are steps consumers can take to try to hang on to their homes.

Homeowners must be aggressive about dealing with their loan problems, whether it means answering the lender's phone calls or e-mails promptly, or finding more income to meet the mortgage payment.

Bob Ivan, mortgage broker with Miracle One Mortgage in Modesto, said, "Some people are too willing to walk away."

He said people often don't realize how much damage a foreclosure can do to their credit, potentially affecting their ability to rent or buy another home, or get other credit.

The foreclosure process typically takes a minimum of four months before a home can be repossessed. The process starts with a formal notice of default and ends with homeowners catching up on payments, selling their homes, renegotiating their loans or losing their homes to lenders.