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Mortgage Foreclosures Rising

Experts: Unethical lending practices, slowing construction industry to blame.

During the run-up to last year’s local spring elections, one of the major issues facing Herndon was finding a way to deal with skyrocketing real estate assessments.

A booming housing market had left town residents with greatly expanded local property tax bills and town officials were forced to pull down tax rates to meet the exponential gains. There were only seven homes listed as foreclosed under a Herndon address throughout 2006 according to a real estate database run by Metropolitan Regional Information Systems, Inc.

But as the national housing market began to cool off and homes began to sit on the market for longer periods, the dust of the regional real estate boom began to settle.

Herndon officials began to wrestle with the prospect of a flat revenue source from residential real estate taxes, and local real estate agents watched as foreclosures began to spread throughout the area.

"Foreclosures used to only traditionally happen when you had to face death, bankruptcy or divorce," said Jeff Shumaker, a real estate agent with Home Real Estate Corporation. "But now we’re starting to see all over that it’s no longer the case. People with jobs, with family incomes are starting to default throughout the whole area."

A former mortgage loan lender, Shumaker works to process and sell homes after former owners default on their mortgages. A large number of them that he deals with are in Herndon.

In the first six months of 2007, there have already been 51 properties listed as foreclosed in Herndon, according to real estate figures. As some agents do not list their homes as foreclosed outright, that number is "more realistically 70 to 80," said Schumaker.

"People were buying at the height of the market and they were getting into these loans that they just couldn’t afford," he said. "It was the people who got loans who had no ability to pay off these loans, that’s who we are seeing popping up in these foreclosures."

FIVE YEARS AGO, with residential and commercial expansion drenching the local economy with new jobs and housing options, the easiest investment in the world to a number of area residents appeared to be in real estate, Shumaker said.

"It blew up very quickly, the property value escalated at a huge rate," he said. "Everyone was buying into this pipe dream that they were going to be rich overnight through property ownership."

And when some lenders began to take notice of the land grab, "unethical practices" were brought into play, according to Shumaker.

Predatory lenders would sit down with a prospective homebuyer — often someone buying his or her first house — and would convince that person that a certain house was affordable under a sub-prime or an "all interest" mortgage, Shumaker said. That person was often promised the possibility of cashing out any property after a year or two, selling the home and moving on, he added.

Some overzealous lenders would break ethical practice regulations and fill out applications for borrowers, exaggerating income levels and assets so that the applicant wouldn’t be turned down.

"You had people who had no business getting mortgages, and these lenders were filling out their applications for them, putting down whatever it took to get them approved," Shumaker said. "These people would have never received their mortgages if they would have filed them normally."

"They were giving out loans to anybody with a heartbeat."

AFTER CASHING out on the mortgage, the loan officer took his or her share and would leave the borrower with what would eventually be a financial time bomb, set to go off when adjustable mortgage rates kicked in, typically around two years from the approval of the mortgage, according to Shumaker. Few were bothered by the arrangement until the principal payments began to skyrocket.

As the market began to lose steam, mortgage refinancing options disappeared and the construction industry began to feel some of the sting of the fast disintegrating business.

"You now have an industry that has basically imploded on itself," said Shumaker. "When the market came down, tons of jobs in the [construction] industry were lost, drying up a large amount of the cash used to pay mortgages."

And the growing immigrant and Hispanic population, many of whom were depending on home construction and related jobs as a main source of income, faced the brunt of the deflating housing balloon. More than half of the foreclosed homes in Herndon that Shumaker has sold over the course of the year belonged to Hispanic residents.

"I saw definitely that there was predatory lending, and that the Hispanic families were being targeted," said Jorge Figueredo, president of Security One Bank, a regional bank catering to the Hispanic population. While working as the executive director of the Hispanic Committee of Virginia five years ago, Figueredo and others recognized these practices and worked with other non-profit and Hispanic groups to set up safe home-buying seminars. "‘One thing is what you desire, but another is what you can afford’ was our motto," he said.

WHILE DETERMINING the long-term effects on the regional economy due to the recent surge in home foreclosures won’t be possible for a few years, its overall effect will be hardest felt on the personal level, according to John McClain, senior fellow at the Center for Regional Analysis at George Mason University.

"Obviously there is a heavy impact on those who have been foreclosed, it will have a major effect on families dealing with that," McClain said.

And although the construction industry has been facing setbacks and banks will be taking a loss from the sale of foreclosed homes, it is likely that the diverse nature of the regional economy and the strong job market will keep the area economically healthy as the housing market works to steady itself, McClain added.

"As long as the economic fundamentals remain strong, the area will continue to be economically viable," he said. "There are not too many other places that have a better job market."

Still, the recent trend of foreclosures isn’t likely to disappear quickly, as "thousands" of mortgages are due to be readjusted for the first time in the coming months, Shumaker said.

The question as to how this many loans were issued will need to be addressed by industry regulators and federal policymakers and new, more affordable mortgages will need to be introduced in order to halt a repeat of the current situation, Shumaker and McClain said.

"We’re just coming through a period where we are dealing with a situation and we will need to readjust," McClain said. "And for some people, this will be a very big adjustment."

Nate Waggoner contributed to this report.