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http://www.mercedsunstar.com/local/story/13858426p-14429875c.html


Merced Sun Star


EDITOR'S NOTE: This story is the first in an occasional series about Merced's skyrocketing foreclosure rate, and what the loss of people's homes will mean for the community. To view the series in its entirety, go towww.mercedsun-star.com/foreclosures.

Less than a year ago, Mark Gallegos was poised on the brink of success. His South Merced house had doubled in value. Like hundreds — if not thousands — of other Merced homeowners, he used that asset to grab $270,000 in home equity loans. That money went quickly to fund a business he'd long dreamed of owning.

Today, the 45-year-old is poised on the brink of failure. His mortgage company has started foreclosure proceedings. Standing on the lawn of his S Street house, he jerked a thumb toward a group of homeless people congregated in a park down the block. "We've got about 90 days to resolve this or we're going to be living over there with those guys," he joked grimly.

Gallegos and his mother Diane, who owns the house, have found themselves becoming points on a trend line they'd just as soon avoid. With home values tumbling, the Gallegoses are "upside-down." That's real estate lingo for owing more than your house is worth. The fact that more and more locals know all too well what that phrase means shows just how commonplace the F word — foreclosure — has become in the Valley vocabulary.

This story describes the experiences of three residents who've turned upside-down.

Statewide, the number of homeowners behind on their mortgage payments reached a 10-year high in the first quarter of this year. The Central Valley is on the verge of becoming Ground Zero in the foreclosure stakes. In June, Merced County ranked second in California behind San Joaquin County in foreclosure activity per household, according to online data provider RealtyTrac. That statistic measures the number of people who are at least three months behind on their mortgage, the number of houses slated for sale at public auction, and the number of houses that banks have actually repossessed.

The fallout from soaring default rates is spiraling well beyond the shattered dreams and damaged credit of homeowners. Capital Corp of the West, the parent company of County Bank, reported recently that a foreclosed loan to a housing developer had put a $5 million dent in its quarterly income compared with last year. Law enforcement officials and social workers are concerned that panic and pressure may drive people losing the roof over their heads into alcohol, drug or domestic abuse. Educators fear an erosion of the property tax base would mean fewer funds for schools and students.

National attention has focused on the plight of homebuyers unable to pay back subprime loans — typically given to people with tarnished credit histories and prevalent in low-income and minority communities. But the current list of Merced houses headed for foreclosure includes at least one address in the North Merced neighborhood less than a 9 iron's pitch from the country club.

Nobody is immune. Even people who worked — and thrived — in real estate during the boom that preceded the opening of UC Merced find themselves losing their houses.

Among them is a 28-year-old former loan processor who bought a house in Merced for $220,000 in January 2006, hoping to flip it after a couple of years. Months later, he lost his job, and his silent partner bailed. He hasn't made a $2,000 monthly mortgage payment since November.

He didn't want his name used because he hopes to work in real estate again. "It's a lucrative business," he explained.

He also defended the lending industry against the bad press it's gotten lately. "I'm not saying every loan was explained properly, but at end of day, it's the consumer who signs on the dotted line," he said. "The picture that's painted in the media is that everybody that got into a subprime loan is a victim and that loan officers and real estate agents are just a bunch of bad guys out there trying to screw over the hard-working middle-class homebuyers. Even though I'm losing my home, I'm not a victim."

Victim or not, he's now packing moving boxes. Next week his house will be sold to the highest bidder at a public auction.

In Merced, those sales happen almost daily on the grassy patch outside the old courthouse building on W. 21st Street. Last Tuesday the scene played out like a 19th century melodrama: a man from a trustee company stood under a tree and read aloud the addresses of houses on the block and their asking prices. A few feet away, a woman cried behind her sunglasses over the Los Banos house she was losing.

No one bid on the properties that day, so all of the houses went "back to the benny" — short for beneficiary, the legal term for the lender.

That's what's about to happen to the North Merced house a local business owner bought in 2000 for $135,000. As his home's value nearly tripled, he refinanced several times and now owes $365,000. Like Gallegos, he took out loans to start a business that failed. He said he was too embarrassed to let his name appear in the newspaper. But he offered plenty of theories on why so many Merced homeowners took out loans they couldn't afford.

"A lot of people here are tired of living check to check and they say, 'My house has doubled in value and there's a chunk of change just sitting there. I could take it and for once have a little money in my pocket,'" he said. "You see a lot of people driving Hummers around town and they probably make $15 an hour. That money came from their house."

But Mark Gallegos said his family didn't waste their home loan money on "candy."

Before the plan to start his own business, the family used home equity loans to remodel their house and invest in their children. Now they're the proud parents of three daughters: one who graduated from UC Berkeley, another who served in Iraq with the Marines and another who works in advertising in Texas. But Gallegos' plan to start a business creating art for restaurants is a goal that will have to wait for now.

Gallegos doesn't consider himself a victim, but he wants people to know that banks and businesses aren't the only losers in the foreclosure equation.

"It was getting real easy to borrow money," said Gallegos. "It was getting real easy to follow your dream. But unfortunately it all went downhill."

Or upside-down.

Reporter Leslie Albrecht can be reached at 209-385-2484 or lalbrecht@mercedsun-star.com.

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