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October 28, 2007

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

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

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.

They want a deal, not a house

Connie Perry, a broker with America's Lender in Ceres, said lenders would rather work out a deal, if they can, than take the house back.

"It's a small percentage that I've helped," she said, explaining that many loans, especially subprimes, are tough to modify.

"But there will be more distressed loans as it gets worse, and you'll see banks wanting to cooperate more," Perry said.

Riverbank homeowner Dale Andrews said he was able to turn a potentially troublesome loan into a workable one.

When he bought his home a few years ago for $389,000, he figured he'd only hold on to it long enough for it to appreciate and then sell it for a profit. But as the market slumped, he decided to stay.

"When it was an investment, I wanted the loan as cheap as possible," he said of his original mortgage. The loan's interest rate was fixed for three years and then would adjust from 4.62 percent to 7.5 percent, making finances too tight.

So he got a new loan that eventually converts to a 30-year fixed loan. "It sounds like I was one of the lucky ones," he said.

Lenders and real estate agents said homeowners need to know what their options are if they're facing foreclosure, and especially learn current market conditions.

"The lenders that came up with creative loans are gone, and it's up to the consumers to find this out," said Reta Sanden, a Turlock Realtor for PMZ Real Estate. "The fact that we have so many homes on the market for sale really hurts the family that needs to sell their home."

At a Modesto meeting last month on strategies to avoid foreclosure, one lender said she was frustrated that she could assist less than 5 percent of those who approached her for loan help, because most of them lack equity.

Although lenders are under increasing pressure from Congress to develop programs to help consumers refinance loans so they can avoid foreclosure, such assistance is limited and more than 50 mortgage firms nationwide have gone out of business.

If a house hasn't appreciated, lenders said, it's hard for them to find a way to refinance the loan. That describes many valley homes.

Is selling the best idea?

But if refinancing isn't an option, selling might not be either, said real estate agents. The excess of inventory means there is plenty of competition for buyers. A seller whose house is priced higher than it should be is less likely to find a buyer.

Real estate agents say prospective sellers should look at the price of comparable homes in their neighborhood. Then sellers need to determine if the troublesome loan still can be paid off if they bring their prices more in line with what's on the market.

The federal Department of Housing and Urban Development encourages distressed homeowners to contact HUD counselors and consumer counseling groups. They help develop strategies for dealing with worrisome loans, curbing other spending and developing budgets.

Experts also warn that homeowners should be wary when they're approached about a new loan by a group they don't know. Con artists often convince distressed borrowers that their only salvation is turn over the title to their houses to them. Such a decision often leads to eviction.

If the loan is unworkable, experts said, borrowers should look for creative ways to hang on to the house.

Perry, with America's Lender, said homeowners must be willing to try "alternative medicine," such as renting out a room or taking a second job.

Whether any of this advice will work for Salvi and her family remains to be seen.

"I can't let it get me so far down that the kids see that it's getting me down," she said.

Foreclosures for some are inevitable, Perry said.

"No longer do you have a home that's an ATM for Christmas shopping or a new car," he said.

Lenders tell Salvi to call back next month, when the market might be better. She's looking for work again, though she's still got a packed, family-oriented schedule.

"We don't have new cars, and we don't have a new boat. Without the refinancing, we would've lost the house a long time ago," she said, referring to the family emergencies.

"It's a sad feeling, and scary."

Bee staff writer Ben van der Meer can be reached at or 578-2331.

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