Standing open, a high wooden gate welcomes visitors into the tasteful front courtyard of Mike and Shannon Lee's hacienda-style home. On the right, water cascades from a fountain of blue Mexican tile built into a buff-colored stucco wall. All around, cushioned conversation groupings beckon neighbors to stay awhile, perhaps to sip drinks in the shade of broad umbrellas.
But the Lees, who moved into the upscale Chula Vista, Calif., community of Eastlake just over two years ago, don't have as many neighbors as they used to. The house next door is empty; in the yard, a sign barks "Foreclosure" in bright red. The house next to that is also in foreclosure, the ReMax shingle in the barren front yard now smashed into shards that twist like hanged men in the light spring breeze.
The neighbors across the street from the Lees are also in trouble: On paper, their house still belongs to them. But they are in mortgage default and scrambling to sell before the bank repossesses their home. It won't be long.
"We had become close friends with them," said Shannon Lee, who owns a home-furnishing textiles wholesaling firm. "They got in on an adjustable then the interest rate went up. Now they can't afford the mortgage."
The realty sign hanging in that yard does not say "Bank-owned" or "Foreclosure," which is telling in itself: The foreclosure problem in California is even worse than it looks.
Statewide, lenders last year filed 254,824 notices of default, a jump of 143 percent over 2006. Foreclosures more than quintupled to 84,375, according to DataQuick Information Systems. In San Diego County alone, foreclosures tripled to 7,349 in 2007.
Eastlake zip codes were the hardest hit. Not long ago, this area was a builder's paradise where stone-gabled McMansions sprang like kudzu from the soil of what had been a blue-collar border town. Between 2000 and 2005, home prices doubled. Developers sold houses as quickly as they could build them. Speculators snatched up new properties to rent then flip, raking in five- and six-digit profits.
As across the country, suspect loans pressed low interest rates even lower, luring middle-class families to buy homes in the $600,000 to $800,000 range, with many crossing the million-dollar threshold. These buyers bet on hopes that a future raise, a paid-off car loan, or rapid refinance would help them pay the mortgages they could not actually afford. But after home prices throughout San Diego County peaked in November 2005, they plummeted an average of 17 percent.
In Eastlake, values fell up to 40 percent, according to realtor Gary Kent, who specializes in handling bank-owned homes in the area. That crash collided with rising interest rates, turning neighborhoods like the Lees' into forests of foreclosure.
Eastlake churches are feeling the fallout. Tim Fillmore, pastor of Parkway Hill Church of the Nazarene, a 200-member Eastlake congregation, said one family he's counseling financed their home with a negative-amortization, interest-only loan. Now, he said, "They're getting double-killed."
That's because the principal amount that's due every month wraps into the loan balance, notching it upward even as the property's value falls. Higher interest rates mean that a conventional loan, if the family could get one, would double their payments. And selling is no option due to a $100,000 shortfall for which the family would remain liable even if divested from the property.
This financial domino effect is common: Not only do many California homeowners owe more on their mortgages than their homes are worth, but many banks and realtors will not touch what is known in the industry as a "short sale." To even qualify for a short sale, sellers must first demonstrate that some hardship, something out of their control, has prevented them from making their mortgage payments on time-and an upward adjustment of a mortgage interest rate is often not enough to satisfy a bank.
In addition, most banks won't entangle themselves in a short sale unless the homeowner has already located a buyer. That means sellers often must price their homes artificially low in order to generate interest, thus further repelling banks, who want to recoup as much as possible on the existing mortgage.
This perfect financial storm means fewer Californians in default are able to avoid foreclosure. A year ago, less than a third of homeowners who received default notices eventually lost their homes, according to DataQuick. Today, six in 10 slide into foreclosure.
Fillmore said Eastlake's subprime crisis has not yet hit Parkway Hill in the offering plate. But it is affecting a number of families spiritually. "What I've seen is that the crisis is causing them to turn to God and say, 'Help!' They might have gotten to this place because of poor spiritual choices," he said. "However, a recommitment to the Lord can be one of the things many people in crisis go through."
Fillmore refers struggling parishioners to trained financial counselors to help with the dollars-and-cents aspects of the problem. Meanwhile, he counsels them spiritually-and realistically: "It's not that God's just going to wave His finger and they're going to get out of this deal. They're going to need all the grace and wisdom and mercy they can get."
Ben Sigman, co-pastor of 4,500-member Eastlake Community Church, said several families in his church have lost their homes to foreclosure. Sigman is quick to point out that even people who have handled their money relatively responsibly-putting 10 percent down and financing a home with a standard adjustable-rate mortgage, for example-have been caught in the rate-rising, value-falling crunch.
"Emotionally, it can be devastating," Sigman said. But the ultimate impacts are not all bad. Sigman has counseled three different families who lost their homes because of high-interest, high-payment loans, but who did not lose their jobs. "These families are finding that to rent a similar house, even in the same neighborhood, is often a couple of thousand dollars a month less," Sigman said. "That's the weird thing I didn't anticipate: For some families, this has been emotionally difficult, but there has also been financial relief."
One woman told Sigman that she and her husband had been focusing "pretty much on money," laboring to maintain an upper-middle-class lifestyle. "Now they're getting their focus back on Jesus," Sigman said. "She said losing their home was the hardest thing that's ever happened to them financially, but probably one of the best things that's ever happened in their marriage."