An Oregon Home Loan Story: Default Lesson Learned the Hard Way

At first glance, it sounded like the perfect home loan.

When times were tight, Lola could pay as little as 1 percent interest on her Ashland home, postponing a payment or two until the end of the loan. And it was an adjustable-rate mortgage, which typically starts out lower than a fixed-rate Oregon mortgage.

Now Lola, who did not want to give her last name, must sell her beloved house. Rising home mortgage rates have increased her payments, and she can’t make them anymore on a Social Security income. She owes more on the house now than when she bought it.

Lola’s not alone. Defaults on Oregon home loans in Jackson County have skyrocketed in the last year, increasing by 82 percent since 2005. According to the Jackson County Clerk’s Office, 400 defaults were filed in 2006, compared with some 220 the year before. In December — always a busy month — 71 were filed last year, compared to 25 in 2005.

This year promises no better: 46 defaults were filed in January, 40 in February and 57 in March.

Financial experts say bad credit home loans are largely to blame. Almost 10 percent of subprime loans are delinquent — up from almost 4 percent a year earlier — compared to 1 percent delinquency in loans overall in the county’s residential-commercial market, said John Zupan, a broker with Windermere/Van Vleet in Medford and ex-president of the Rogue Valley Association of Realtors.

Almost 8 percent of mortgages in this area are subprime, he said.

Subprime loans appeared to be the golden door into a hot housing market, especially for first-time buyers with low credit scores. As long as rapid appreciation in home values continued and interest rates remained low, the borrower could continue to make the payments and build enough equity to mortgage refinance into another loan with a lower interest rate.

A pay-option adjustable-rate mortgage such as Lola’s offered homeowners a choice each month of paying a lot or a little and gave flexibility for lean months, said Judi Robinson of People’s Bank in Medford, who is helping Lola get into a better loan package for a new home.

However, once the Oregon real estate market slowed, interest rates climbed — and so did the payments; they proved unmanageable for a large segment of homeowners. A year ago, only a couple of defaults were filed every week. Now it’s two, three or four a day, said Jackson County Deputy Clerk Chris Walker.

Calls to defaulting buyers were not returned or the buyers declined to comment. A summary of the “default with election to sell” statements in the clerk’s office, however, listed many with high interest, payments and balance.

“The foreclosure rate here is fairly high. I get a list every week and it’s an inch-and-a-half thick,” said Chris Jacobsen, retail loan officer for Cox, Beard and Jacobsen in Medford. He estimates that 80 to 90 percent of foreclosures here are subprime.

Said Robinson: “I call them ’slime-prime’ loans. I saw 16 foreclosures filed in the last two weeks. Most are nonconforming, subprime loans. People were not qualified and got loans with a ’stated income’ program. The way they were qualified was pretty sad. The subprime market was developed for people who don’t pay their bills.”

The result?

“Now they owe more than they have,” Robinson said. “They’re unable to sell because they owe more than it’s worth. (Buyers) waited too long to sell. They panic and they do a short sale, where the mortgage company agrees to sell it for less than it’s worth.”

In short sales, sometimes the lender has to “eat” the loss and sometimes the borrower carries it as a debt, she said.

Defaulting borrowers can sign a “deed in lieu of foreclosure,” meaning the house is signed back to the lender, with the lender’s blessing. Foreclosure is “a cumbersome process” for lenders, said Linda Cade, housing director at Consumer Credit Counseling in Medford.

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