HOUSING: City issues mortgages in depreciating market

Its an older program with renewed interest

By ZACH FOX - Staff Writer | Wednesday, October 1, 2008 5:48 PM PDT ∞

While a historic real estate crash has reduced prices in North County, the recession also has caused an uptick in activity to city programs that make grants to first-time home buyers.

To encourage homeownership, Escondido and Oceanside offer interest-free loans to low-income borrowers.

Recently, popularity in the programs has shot up because falling real estate prices have extended affordability to low-income borrowers.

"It fluctuates by the year," said Beverly Peterka, housing division manager for Escondido. "This past year, we did about 115 loans. Before that, we did hardly any."

For James Class, a youth pastor, Escondido's program allowed his family to upgrade from the condominium conversions they could afford to a three-bedroom attached house sufficient for his wife and two children, ages 4 and 2.

"Anything else in our price range would have been a lot smaller," he said. "We love it, we have plenty of room."

But while the local housing recession of the last two years has resurrected popularity in the programs, it also has unleashed a new set of challenges upon the city-issued loans.

Not since the Great Depression have home prices dropped so rapidly, tumbling about 30 percent from a 2005 peak.

The precipitous depreciation puts any equity in homes at risk, meaning it is becoming more likely that homeowners owe more on their mortgages than the value of their homes.

Indeed, Class has lost some value in his home. A nearly identical home to his across the street is on sale for $230,000, down from the $315,000 he bought his home for in August 2007.

Class said he was not worried because he can afford his payments and will wait until the market recovers before even considering selling.

"It could be several years before it makes sense to move," he said.

The same goes for Atom and Wendy Aardappel, who purchased an Escondido foreclosure about a month ago. They said they plan to raise their 18-month-old son, Aaren, in the house and will not move for 30 years.

Atom Aardappel said the city's loan program allowed the family to move into the foreclosure quicker because it freed up some cash for much-needed electrical and plumbing work.

"It needed work right off the bat, and the loan allowed us to make it livable faster," Aardappel said.

Loan programs for first-time home buyers by nature require little or no equity. The programs act as second or third mortgages that help borrowers with down payments.

Because the first mortgage must be paid in full in cases of foreclosure, a few defaults on city-issued mortgages could translate to losses in the hundreds of thousands in taxpayer money.

However, city officials said foreclosures on their loans have been extremely rare. The programs focus not on the property's value, but instead on the likelihood that homeowners will repay.

Escondido's program, which issues loans for $25,000 or 5 percent of the sales price, relies on a bank's appraisal and does not require an independent analysis of the property's value.

"At this point, we don't care. We really think the home market is pretty much at the bottom," said Peterka, Escondido's housing manager. Escondido focuses on the quality of the buyer, she said.

"They have to be approved by the lenders, they have to show good credit and a clean background," she said.

Over the 30-year life of the program, just one loan has entered default, Peterka said.

Oceanside has a similar record, with one foreclosure out of about 1,000 loans issued, said Frank Grana, the city's housing program manager.

"We take our fiduciary responsibility with the public's money very seriously," he said.

But some housing analysts said relying on the banks to properly appraise houses could be dicey.

"Just look at what the banks have done over the last few years. They're losing money hand over fist," said Dave Hopkins, a mortgage broker with Rancho Financial, a brokerage firm in Rancho Bernardo.

Further, some of the loans are already under water, meaning the home is worth less than the mortgage amounts.

Over the last 15 months, Oceanside has issued 16 loans for $1.4 million, Grana said. Escondido, which issues more loans at smaller amounts, has granted 130 mortgages for more than $3 million, officials said.

The loans are available for families that make less than the median income for the area. They carry no payments and are repaid when the homeowner sells the house or refinances the original mortgage.

For the Escondido program, if the family stays in the home for more than 10 years, the loans carry no interest. For homes that are sold before then, the mortgages charge a fixed 6 percent interest rate, which declines to 3 percent a year after five years of residence.

Luis Yamasaki, a truck driver and father of three, took advantage of Oceanside's first-time home buyer program. He secured $89,000 in city money to buy a $345,000 house, according to county records.

Within the house's ZIP code, 24 properties are listed for sale that were built in the same time and are about the same size, priced between $258,750 and $430,000, according to Redfin, an online real estate search site.

Three months after Yamasaki bought his home in one of the county's most foreclosure-ridden areas, a smaller, older home down the street sold for $162,000, or 24 percent less when adjusting for size.

But Yamasaki said he was not worried about losing value in his home. And he said he has no trouble making the payments and plans to live in the house for at least 15 years.

"The price was right. ... It's a fairly new house, and we're pretty sure the housing market will stabilize and go up again," he said. "It's just what we wanted. We might as well enjoy the home."

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business.

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