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At Frontline of Foreclosure Crisis, Counties Go It Alone

Foreclosure-mahurin.jpg
Foreclosure-mahurin.jpg

Image by: Matt Mahurin

With graffiti-scarred walls, an overgrown lawn strewn with crushed cardboard boxes and empty cans and a rusted swing set next door, it’s fair to say that the foreclosed townhouse, part of a complex called Irongate in suburban Prince William County, Va., doesn’t have a lot going for it. It’s hard to tell if things look any better on the inside, since someone broke the lockbox and stole the key.

The unit sold in 2005 for $285,000, but these days it’s going for $50,000 — and it’s still been sitting on the market for more than six months, with no takers in sight. The only sign that anyone’s paid much attention — other than to vandalize it — is a notice in the window saying it’s been winterized.

Debt-150x150_4213.jpg
Debt-150x150_4213.jpg

Illustration by: Matt Mahurin

Places hit hard by the foreclosure crisis, like Prince William County, are dealing with hundreds, and sometimes thousands, of abandoned and deteriorating properties like the Irongate townhouse — the damage left behind by the subprime mess. Unlike banks, insurance companies and others that have gotten a piece of the $700-billion rescue bill to help with their credit crisis problems, cities and suburbs are mostly on their own.

It wasn’t supposed to be this way. Politicians in Washington crowed this summer about helping homeowners with a mortgage rescue bill that included $300 billion in guarantees for refinanced mortgages and $4 billion for communities to buy up and repair foreclosed houses.

But since the Hope for Homeowners program launched in October, the Federal Housing Admin. has received only 42 applications to refinance mortgages. That’s a far cry from the 400,000 or so homeowners expected to avoid foreclosure with the lower payment loans.

The issue is that the program is strictly voluntary for lenders. Congress could have made taking part in it a condition of getting money from the Treasury rescue plan — but it didn’t. In an effort to address this omission, government officials announced last week they would make it easier for borrowers to qualify for the loans, in order to draw more applicants.

The idea behind the mortgage rescue bill during the summer had been to combine those refinanced mortgages with the $4 billion for foreclosed properties, and make a dent, on the ground, in the foreclosure crisis, according to Danilo Pelletiere, research director of the National Low Income Housing Coalition. Instead, foreclosures grew at record levels. Refinancings faltered. Now there’s just the $4-billion piece.

Communities have to finish their plans for the money by Dec. 1. The U.S. Dept. of Housing and Urban Development is going to approve the proposals, and give out the funds in February, at the earliest. By contrast, the Treasury bailout plan was approved in two weeks.

“There is no question that you are throwing a small amount of money at a very big problem,” Pelletiere said. “The way this thing has panned out is that it’s a really small amount of help. It really looks pretty wimpy.”

In the greater Washington area, ground zero for foreclosures is Prince William County, in the outer suburbs. Despite a commute that can take an hour or more, Prince William boomed during the last decade, as buyers flocked to brand-new, spacious homes on wooded lots, or to affordable middle-class rowhouses. It soon became one of the country’s fastest growing areas, emblematic of the expansion of the exurbs around the country. Housing values skyrocketed.

The housing bust was just as dramatic. Foreclosures rose from 246 in 2006 to 2,800 in 2007, and the county expects more than 7,000 this year, said finance director Christopher Martino. It’s the highest number of any jurisdiction in Virginia.

Some 5.5 percent of the county’s housing was in some stage of foreclosure last spring, according to the George Mason University Center for Regional Analysis. Home values have also taken a tumble, down 30 percent this year for single family homes and 40 percent for townhouses.

With the economy weakening, and many loan resets expected next year on interest-only mortgages, more foreclosures could be coming down the pike, Martino said.

Sales of foreclosed houses are soaring in the meantime — but prices aren’t going up. Average sale prices dropped by $90,000 between January and October, said local realtor Keith Elliott Jr.

The country’s share of the $4 billion, aimed at helping middle-income buyers purchase and rehab foreclosed homes, amounts to more than $2 million, said housing and community development director Elijah Johnson. That amount will cover only a small percentage of the county’s troubled housing stock — about 50 to 70 houses, he said.

The state, which also gets a piece of the $4 billion for redevelopment efforts, could kick in a little more,. But, at best, it would just double the total. That’s 140 houses or so, compared to 3,200 unsold foreclosed properties throughout the county.

Still, getting some money, however modest the amount, doesn’t hurt, Johnson said. If the county can stabilize certain blocks in troubled neighborhoods, it could be a first step toward enticing middle-class homebuyers to consider those communities.

“When you take a first look at it, it doesn’t look like it’s going to make a difference,” Johnson said. “But it’s a good start. Our hope is that we can stimulate the market. We want to get that sense of community back; and revitalize the market and get homeowners purchasing units.”

Nationally, the $4 billion will have a scattered effect. It could make a difference in some places and not so much in others, depending on how communities use their money, said Pelletiere, of the National Low Income Housing Coalition.

Some of the funds have been put aside to help with projects for low-income residents — like buying foreclosed apartment buildings to keep renters from being evicted. Cities and towns are hoping to get more aid from the stimulus package proposals that Congress may consider soon.

In the meantime, banks are taking heavier losses than expected on foreclosures, with lots of empty houses sitting on the market. Owners in foreclosure often shut off the electricity, so sump pumps can’t keep basements dry.

In Prince William, most foreclosures aren’t as run down as the Irongate townhouse, and the problem isn’t as severe as in places like Cleveland or Detroit. But heavy rains last year left basements of many high-end foreclosed houses damaged by water and mold. The county had to set aside $1 million to cover the upkeep of foreclosed homes, to do anything from cutting lawns to boarding windows.

Most foreclosed homes are offered “as is.” In Prince William, where foreclosures stretch from modest-income communities like Irongate to subdivisions filled with McMansions, “as is” can mean many things.

Foreclosed townhouses dot a much-sought-after subdivision in Bristow, where the properties had once commanded prices of $300,000 and up. A three-level foreclosed townhouse just hit the market for $189,900, and the buyer will have to deal with minor water damage and ripped drywall in the basement.

A handyman’s special in Manassas sits abandoned and gutted inside, with a never-installed jacuzzi tub resting on its side in the dirt. It’s a short sale, meaning the owner is trying to avoid foreclosure by selling at a loss.

In a subdivison of more upscale houses, in nearby Gainesville, a spacious three-bedroom home looks nearly untouched by damage except for some stained carpeting. But the orange stickers noting that it’s been winterized are dated from December 2007, meaning the home has been vacant for nearly a year, despite its sales price of $270,900, well below its assessed value of $327,100.

Elliott, the realtor, said he’s not surprised. “There’s just a huge volume of houses like this all throughout Prince William County,” he said.

There are some hopeful signs. For the past two months, sales of foreclosed houses outpaced new foreclosures, though by just a handful, Martino, the finance director, said. He hopes that trend continues, so sales will work through the backlog of foreclosed homes.

People like Kurt Seastead see both sides of the foreclosure picture in Prince William.

On a recent afternoon, moving vans sat outside a house Seastead had just bought for his family. Seastead stood in the hallway, directing movers to put the washing machine in the basement. The house had recently been foreclosed on by Washington Mutual, a failed subprime lender.

Seastead bought it after he sold his dream house, a 10-acre property in the nearby upscale community of Haymarket. It had sat on the market for six months, and he dropped the price from $800,000-plus to $710,000 to motivate a sale.

A month later, he bought his new home, which he found once he started seriously looking when his dream place had sold. Seastead shopped specifically for foreclosed houses, figuring he could find one quickly, at a good price. The house is in a smaller subdivision, in neighboring Gainesville, and cost $325,000.

Seastead said he cut his mortgage payments and taxes in half by buying the foreclosure, and was able to avoid laying off any employees at his building and remodeling company. He also got some financial peace of mind, since he was getting uncomfortably close to facing foreclosure in his previous home, due to the high mortgage payments. And he ended up with a nice house for his wife and two teenagers, featuring shiny wood floors and high ceilings.

But foreclosed houses get damaged, even in suburban cul-de-sacs. The former owners had smashed the granite kitchen counters, ripped the cabinets off the walls, pulled down lighting fixtures and taken the stove and refrigerator. Seastead cleaned up “a flood in the basement” and fixed the furnace after he warned the realtor the sump pump seemed to be broken, but nothing got done.

Seastead expects to pay $20,000 to fix up the kitchen and other damage. But getting out from under a far bigger adjustable-rate mortgage payment, and keeping his workers employed, outweighs any drawbacks, he said. “The break you get from a big mortgage payment is definitely worth it,” Seastead said.

For communities like Prince William, where foreclosures continue while Washington debates about helping out, any breaks are welcome.

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