It has taken Susan Erb just three years to see the value of her Merced, Calif., home plunge by more than half to $350,000. Next month, her mortgage payment jumps 20 percent to $3,321, and she knows she can’t afford it. Her bank won’t rework the loan unless she stops paying altogether.
“Now I know how people feel when I go knocking on their door,” said Erb, 53, a real estate agent who works for a company that notifies residents in foreclosed properties that they must vacate. “I’m in their shoes.”
Merced, the epicenter of the U.S. foreclosure crisis, demonstrates the steep challenges President Barack Obama will face in trying to stem defaults. One in 59 housing units in the Merced metropolitan area received a foreclosure filing in January, the highest rate in the U.S., according to RealtyTrac, an Irvine, Calif.-based seller of default data. For-sale signs are everywhere, and a building boom fueled by subprime mortgages has been brought to a standstill. Just 16 construction permits were issued last year. In 2005, there were 1,427.
“We’re ground zero,” said Merced Mayor Ellie Wooten, 75. The city, population 81,000, had an unemployment rate of 15.5 percent in December, “and it’s going to get worse,” she said.
Obama unveiled a series of measures in Arizona to reduce record home foreclosures and halt the erosion of property values. As many as 9 million people can restructure or refinance their mortgages under the proposal.
The measures come amid a worsening economy and plunging home values that have put 17.6 percent of mortgage holders under water, or owing more than their property is worth, Seattle-based Zillow.com said Feb. 3.
Modifying loans and reducing principal may not be enough to keep people in their homes and fix the housing market, Ethan Harris, co-head of U.S. economics research for Barclays Capital Inc. in New York, said in an interview.
“There’s a chunk of these loans that are unsustainable, where people have gotten divorced or lost their jobs, or the loans were way beyond the borrowers’ capability to pay in the first place,” Harris said. “A lot of the loans were not designed to be repaid; they were designed to be refinanced. That works only when housing prices are going up.”
The “sheer volume of bad loans” is also a challenge, Harris said. “Getting the process going is very tough to do with such volume, even when it’s in everybody’s best interests.”
U.S. homeowners lost an estimated $3.3 trillion in house value last year, real estate valuation service Zillow said. In California, the state with the most foreclosure filings, the share of underwater owners will rise to a third of all mortgage holders by the end of the year, according to data provider First American LoanPerformance of Santa Ana, Calif.
Merced, located about 110 miles southeast of San Francisco in California’s agricultural Central Valley, became a housing boom town in the early part of the decade as buyers with subprime loans sought affordable property within commuting distance of Bay Area job centers, said Jeff Michael, of the University of the Pacific’s Eberhardt School of Business in Stockton.
Median home prices in Merced rose from $150,000 in January 2002 to a peak $382,750 in December 2005, according to MDA DataQuick, a San Diego-based property research firm. In December 2008, the median stood at $120,500, down 52 percent from a year earlier, as four out of five resales involved properties that had been foreclosed on in the prior 12 months.
“There were a lot of young families and first-time buyers with not a particularly high income, so it was perfect ground for subprime lending,” said Michael, who directs the school’s business forecasting center. “You had people streaming in from the Bay Area. This was their chance to get in.”
-With reporting by Bob Ivry in New York and Robert Schmidt in Washington.