Califoreclosure

Creative financing's dark side

Susanna Desborough is facing an embarrassing problem for a real estate agent. She is losing her own home in a foreclosure proceeding. Desborough has been unable to make the $825 monthly payments on the house in the Chatsworth section of Los Angeles, and now is more than $10,000 in arrears. Valley Federal Savings & Loan Association, which holds the mortgage, plans to sell the house next month. Says Desborough: "The situation became like a monster that kept growing."

A record number of people are facing that same beast. The Mortgage Bankers Association of America reported last week that some 140,000 U.S. homes were foreclosed during the first quarter of 1982. Payments were delinquent on more than one out of every 20 home loans.

California, the pioneering land of creative mortgage financing, has had a particularly sharp rise in foreclosures. Lenders took possession of 7,163 homes throughout the state in the second half of 1981, more than tripling the total for the same period in the previous year. David Shulman of the U.C.L.A. Business Forecasting Project predicts that up to 8,000 residences may be foreclosed in Los Angeles County this year. That would be a 175% increase over 1981. Says he: "This is only the beginning. It will get much worse."

One of the main ways that Californians have been financing the state's housing boom is with short-term loans in which virtually all of the principal comes due in a single so-called balloon payment, usually within two to five years. Homeowners had assumed that their houses would continue appreciating in value and that they would be able to borrow against the equity to pay off the balloon loan. But prices are now stagnating, and new loans are hard to get. Nearly $500 million of these balloon mortgages are coming due in California this year, and Shulman and other economists fear that cash-strapped homeowners will be unable to make them.

Many California residents also borrowed heavily against the value of their houses as real estate prices rose, and are now saddled with crushing debt. Says Don Martin of Security Pacific National Bank: "When we get into the foreclosure process, we find that many of these buyers have taken out second, third and even fourth mortgages." Martin says the current default rate on residential loans for his bank is twice that of a year ago.

As foreclosures have risen, so have the number of services that offer advice to debt-ridden householders. Mildred Todd, who lost her own home to foreclosure 15 years ago, now holds seminars for Los Angeles-area residents faced with similar problems. During a two-hour course (cost: $20), she introduces homeowners to the various legal, financial and insurance options available to them if they get in trouble with their mortgage payments. Todd, though, offers no easy solutions. Says she: "Nothing can really stop a foreclosure except cold, hard cash."

Major banks and savings and loans may let payments slide for a three-month grace period before starting foreclosure on a property. In California, homeowners legally have 90 days to make up delinquencies once a foreclosure starts. After that, lenders can move to sell the property. However, some moneymen offer almost no grace period. A group of private investors started proceedings against Colombian Immigrant Francisco Cubillos in March when he missed a $1,131 payment by just 17 days. Cubillos was able to keep his Chatsworth house only after he paid a $600 penalty along with the missed installment.

A few California consumers have turned their monthly housing payments into a risky financial game. Businessman Craig Bowers stops paying the mortgage on his Tarzana home whenever he is short of cash, and resumes when times are better. Bowers has survived three foreclosure actions in the past two years, and still has his house. Says he: "Foreclosure is a game which I play. I know down to the hour when I have to pay the piper."

Many experts expect foreclosures to continue climbing in the U.S. because of the recession and towering interest costs. A rising default rate can also make hard times worse. Consumers feel poorer and tend to spend less when they fear for their homes, or when values are dropping, since housing is the largest investment that most people make. In California, where home prices have more than quadrupled since 1970, the impact of foreclosures may be especially damaging. Says Shulman: "People here have been counting on their homes to build their fortunes." Those fortunes increasingly look as if they may be built on sand.

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