Mortgage defaults force Denver exodus

Foreclosures are ripping through the rows of new homes in the flatlands where Denver turns to prairie. Every week, 10 more families here need to find someplace else to live.

Six months behind on their mortgage, Dave Evans and his wife, Suzie, packed the contents of their modest blue house here into a rented truck one day in July. The move came after weeks spent alternately crying and searching in a frenzy for somewhere to go. "At the end, it was so close we could have wound up on the streets," Dave Evans says.

Around the corner, Paul Dardano moved his wife and children into his mother's duplex after he realized his house was headed for foreclosure. Then their friends' houses here started emptying, too, as they scattered to relatives in other cities.

"It just happened," Dardano's wife, Eva, says, "one after another."

For hundreds of homeowners in this mostly middle-class corner of Denver — and an estimated 1.2 million more nationwide — the wave of foreclosures battering U.S. financial markets is quickly unraveling the American dream. Those who have lost homes here describe seeing their lives crumble into anxiety and embarrassment. Many leave for cheap apartments or rooms with relatives, a trend that is tightening the market for affordable housing.

This small corner of the Mile High City represents an extreme example of how foreclosures are transforming lives and neighborhoods. On some blocks, as many as one-third of the residents have lost their homes, making this one of the worst hotspots in a city that was among the first to feel the pinch of the foreclosure crisis. Many houses here remain empty, bank lockboxes on the front doors.

The foreclosure epidemic has swept so quickly through this part of Denver that in less than two years, lenders took action on 919 of the roughly 8,000 properties here, according to city records. Their owners defaulted on more than $171 million in mortgages they had used to buy their way out of apartments and into cul-de-sacs. Many were buying homes for the first time, in what seemed the most affordable of the city's new subdivisions. They paid their way with easy credit — sometimes secured from aggressive lenders who appeared to look past the checkered credit histories and unstable jobs of some of their customers. Ultimately, many of the buyers couldn't afford their mortgages.

Today, the tide of unpaid bills and lost homes is getting deeper.

Denver officials say they expect 11,000 foreclosures this year, up from 7,700 last year, mirroring increases nationwide. By the time homeowners get a foreclosure notice in the mail, they most likely have fallen too far behind in their bills to ever catch up, says Sindee Wagner, a deputy in the city's Public Trustee office, which processes the filings. Almost all of those who get such notices wind up losing their homes.

"The people ultimately getting hurt here are the homeowners, often lower-income people that probably should never have been approved for a mortgage in the first place," she says.

There has been little research tracking where those who lose their homes are going, says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. But Colorado officials such as Kathi Williams, director of the state Division of Housing, and housing assistance groups here and in other cities say demand for low-cost apartments is soaring. In some cities, those rentals have become so scarce or hard to get into that onetime homeowners either move in with relatives or leave town.

Meanwhile, two recent surveys of local officials and service providers, including one taken informally and completed last month by the National Coalition for the Homeless, suggest widespread foreclosures are driving an increase in homelessness and demand for emergency housing.

"Usually the handwriting on the wall has already dried by the time they realize they have to find another living arrangement," says Lou Tisler, the executive director of Neighborhood Housing Services of Greater Cleveland, a foreclosure counseling group in a city that ranks among the nation's worst for lost homes. "They're focused on the crisis at hand, not realizing there's another crisis behind" it.

A neighborhood plague

As in many cities, foreclosures in Denver are now nearly ubiquitous.

Every third block in the city has seen at least one in the past 1½ years, city records show. Last year alone, Denver averaged one foreclosure filing for every 32 households, the product of a building boom that collided with high-risk loans and thousands of borrowers willing to stretch their finances too far to buy a house. In the first half of last year, the city had one of the nation's worst foreclosure rates.

Many neighborhoods in Denver and across the nation have largely been spared from that tide, but others have been hammered.

That's especially true here, along the broad avenues of Green Valley Ranch, a remote subdivision of soft-colored houses with red-tile roofs sewn into the vast carpet of flat, open land on the city's eastern edge. As Denver's housing market boomed at the beginning of this decade, the area became a magnet for low- and middle-income families buying their first homes in the kind of brand-new neighborhood they once thought would always be beyond their reach. Some turned to more-expensive subprime loans, which charged higher interest rates to borrowers with bad credit. Others got adjustable-rate mortgages and saw their payments increase sharply after two years.

Now those houses are empty again. One belonged to Dave and Suzie Evans.

Theirs was a tidy, two-story house on Orleans Street, with two bedrooms, blue siding and a stone facade. Dave Evans admits the $182,000 mortgage they took out was more than the couple could afford, even with both working.

"My parents taught me not to spend more than a third of your paycheck on a house, but that went out the window," he says. They wanted to buy and fell in love with the house. For a time, it worked.

Then Evans lost his job as an electronics technician. The couple fell six months behind on their mortgage. Their credit cards slipped, too. And their car payment. At first, creditors called at all hours. Then even the bank stopped calling. "Eventually we sat down and said that's it," Suzie Evans says. "It was almost a relief when we got to the day when we walked out of that house, when it was over."

The bank foreclosed and gave them a deadline to move out. A frantic apartment hunt turned up nothing. Six days before they had to leave their house, they found a condominium to rent across town for $650, less than half their monthly mortgage payment.

"Down the road, we'll look for another house, I guess," Suzie Evans says, though any attempt is certain to be made far more difficult by the crater the foreclosure has put in their credit rating at the same time banks are tightening their lending practices. "But for the time being, we're working to get ourselves out of the hole. We're buried deep."

A few blocks away, foreclosure sent Kim Barcelona back where she started.

Months behind on her mortgage, she says, she came home from a business trip last year and found a note attached to the door of her house. She had been given three days to move out. By then, she was done fighting it. She summoned her sister and boyfriend, and the three quickly stuffed her possessions into cardboard boxes. Barcelona and her 14-year-old daughter moved in with her sister and started looking for an apartment.

A 'last resort' for lenders

Lenders concede they're partly to blame for the collapse of some high-risk loans, but say they're trying to keep many borrowers out of foreclosure by offering refinancing, repayment plans and other options. John Mechem, a spokesman for the Mortgage Bankers Association, says lenders have provided solutions for more than 1 million borrowers nationwide since July.

"No one — not the borrower or lender — benefits when a customer cannot pay back a loan," says Joe Ohayon, a vice president of Wells Fargo Home Mortgage, one of several lenders that has had home loans in Green Valley Ranch. He says foreclosure "is only a last resort."

Patrick Hamill, the founder and head of Oakwood Homes, Green Valley Ranch's primary builder, says conditions are improving here.

Most people who lose their homes to foreclosure become renters again. That's happening so swiftly in Denver and other parts of Colorado that vacancy rates for apartments have dropped from more than 10% a few years ago to about 5% today, says Williams, the Colorado housing official. The nation's apartment vacancy rate dropped from 6.9% in 2003 to 5.6% in 2007, according to research by Marcus & Millichap Real Estate Investment Services.

"We're seeing a lot more stress on the rental market," Williams says. "If more supply doesn't come in, we're going to see rents rise."

That's happening already: The average rent that landlords sought for an apartment in Denver in 2007 rose 3.9% over the previous year, according to Marcus & Millichap.

A month after Barcelona moved out of her home, she signed a lease for an apartment in Lakewood, a Denver suburb where she had lived before she bought her house in Green Valley Ranch. She used money for the security deposit that she had saved while hoping to catch up on her mortgage. Renting saves her $500 a month, but she says it doesn't feel right.

"I don't have anything to leave to my daughter if something happens to me," says Barcelona, 40. "There's no place she can really call home."

There are other obstacles to renting. Foreclosure is a serious black mark on a person's credit report, and many landlords use such reports to screen potential tenants.

Barcelona says the property manager in her apartment complex remembered her as a good tenant and rushed to get her approved before the default showed up on her credit. But that's unusual.

"People are just walking away from their homes because they have no equity, not realizing when they then go to rent and landlords pull up their credit report, they've been dinged heavily and can only get substandard units from people who don't pull credit reports or don't provide decent housing," says Tisler of Cleveland's mortgage counseling group.

Even renters aren't immune from the foreclosure fallout. A renters' hotline in Minnesota logged 427 calls last year from tenants whose landlords were facing foreclosure, up from 79 the year before, says Mike Vraa, managing attorney for HOME Line, which advises tenants on their rights.

Adding to the homeless

In a survey in March by the National League of Cities, almost one-quarter of the 211 elected officials who responded said foreclosures were driving an increase in homelessness in their cities.

The National Coalition for the Homeless' survey of 115 service providers and local officials completed in March found almost two-thirds said they had seen a similar increase, though efforts to actually count the homeless are notoriously imprecise.

It hasn't happened yet in Denver, says BJ Iacino, the advocacy director at the Colorado Coalition for the Homeless. That's partly because people once able to buy a house usually have enough resources to land somewhere. "People don't come to us because they were foreclosed. They come to us 10 steps after that," Iacino says.

More common are people such as Paul Dardano and his family.

Dardano left his home on East 40th Avenue in 2006, before his lender foreclosed. He, his wife, Eva, and their children moved into his mother's duplex before eventually buying a new home with his mother's help. Some other friends and neighbors forced out by foreclosures moved in with family members in other cities or states, Eva Dardano says.

"We do get those folks who've moved from a home into a motel room and aren't clear where they're going to go from there," says Zachary Urban, director of housing counseling for Brothers Redevelopment, which manages Colorado's foreclosure hotline.

It's uncommon but not unique to Denver.

In Kalamazoo, Mich., "people are doubling up" and moving in with relatives, Vice Mayor Hannah McKinney says. Almost 1,000 properties were seized in foreclosures in the county last year, and the city doesn't have enough affordable apartments.

"You can't take everyone who used to be a homeowner, who can no longer afford the home they're in, and find a place in Kalamazoo, or I would imagine in any city," McKinney says.

Instead, the city is trying to set up a network of landlord groups, realtors and other groups "so as people lose their homes in the foreclosure mess, they've got options."

For all the upheaval foreclosures can cause, Denver records suggest the actual money lost by borrowers is limited. Many of the people who've lost homes here had small down payments and had paid little of the principal on their loans when banks foreclosed. As a result, they had little of their own money tied up in the house.

"It may turn out this is less financially harmful than we would have guessed," says Mark Schweitzer, branch executive of the Denver office of the Federal Reserve Bank of Kansas City. "But there's no question it's been difficult. I was at one of the community meetings in Green Valley Ranch, and there was a lot of pain and anguish."

Efforts to help

Officials in Denver, like those elsewhere, are scrambling to help.

The city has hosted town hall meetings in some of the neighborhoods that have been most affected by foreclosures. One meeting two weeks ago drew 300 people. The state set up a foreclosure hotline to pair homeowners with mortgage counselors, who try to help them strike deals with lenders that will let them keep their homes.

Once a foreclosure starts, however, there's usually little anyone can do. Urban, who oversees the hotline, says his agency has begun writing letters to landlords on the former owners' behalf to help them pass credit checks.

Mortgage counselors often can do little more than teach "basic financial literacy" to help them repair their credit and avoid more problems, says Helen Taylor of the Northeast Denver Housing Center, which counsels owners in Green Valley Ranch.

Ray Younger is at that point. He'll likely be the next to leave Green Valley Ranch. He managed to get a mortgage here in 2004 even though he'd recently filed for bankruptcy. Still, he says, buying the house on Orleans Court "was the best thing in the world."

Younger works for the city writing parking tickets; at night and on weekends, he unloads jets for Frontier Airlines. Hurt on the job, he started skipping mortgage payments. The bank foreclosed. The federal government filed a tax lien against the house. Younger talks about finding money to keep the house, but that would mean paying off his whole mortgage — more than $180,000, city records show. Fast. He has until May 13.

"I guess my only option is to start looking for a place to rent," he says.

He has thought about simply walking away. He wouldn't be the first. There are 28 houses on his block of Orleans Court, and 14 have been foreclosed in the past 18 months. Most are locked, their former owners gone.

Jones reported from New York.