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Suburban Blight, coming to a neigborhood near you

From the Dispatch Series on Ohio Forclosures, Highest in Nation

SUBURBAN BLIGHT
Dominion Homes leads the state in FHA mortgage defaults
Monday, September 19, 2005
Stories by Jill Riepenhoff
Photos by Fred Squillante

Big dreams filled Rick and Christy Alonso when they bought their new house from Dominion Homes. Start a family. Build equity. Move to a larger house. But six months later, their suburban neighborhood on the Far West Side began to deteriorate. New houses suddenly emptied. Thistles and dandelions overran lawns. Neon orange labels appeared in windows, signaling foreclosures.


The Alonsos, whose second son was born nine days ago, live on a cul-de-sac, surrounded by houses lost to foreclosures. They want to move
but can’t afford to sell. Their 4-year-old house is worth less than they paid for it.


Foreclosures damage entire neighborhoods. They affect families such as the Alonsos, homeowners who pay their mortgages on time yet find themselves stuck with houses losing value.


Until recently, court records show, new subdivisions have been spared the brunt of foreclosures, which have plagued inner-city neighborhoods for years.
The recent spate of suburban foreclosures includes buyers whose appetite to have it all — now — leads to financial overreaching.
Bankers, credit counselors, appraisers, consumer advocates and others in real estate also blame some builders who act as mortgage brokers, because their control over much of the deal reduces checks and balances.


In Franklin County, two homebuilders have financing divisions that handle government-backed mortgages: Dominion Homes and M/I Homes.

Only Dominion stands out for homeowners in financial trouble. Comparable data for loans without government insurance is not publicly available.
Federal and county data show that:

• Dominion’s two-year default rate is the highest in the nation among homebuilders with mortgage divisions that handled more than 1,000 Federal Housing Administrationbacked loans. It ranks fifth among all types of large lenders.

• The company leads the state in the number of homeowners who defaulted on FHA loans within two years of closing: 221 between August 2003 and July 2005.

• 11.5 percent of Dominion’s customers in Franklin County have fallen more than three months behind on their FHA mortgages in their first two years of homeownership. That’s nearly 2½ times the national figure. At least half of Dominion’s customers have government-backed mortgages.

• Nearly a third of the Franklin County houses and condominiums built since 1998 that have been listed for sheriff’s sales involved Dominion buyers, a Dispatch analysis found. Of the 1,253 new homes sent to public auction, 395 were built by Dominion and 295 by its larger competitor, M/I Homes.

• Since 2000, Dominion is the only central Ohio builder whose mortgage practices have raised red flags at the U.S. Department of Housing and Urban Development, which insures FHA loans. HUD auditors found violations that included false or undocumented income levels for buyers.

When loans go bad, FHA reimburses lenders 100 percent, removing all risks to them and to the brokers who arrange the financing. The reimbursements are paid from insurance premiums paid by every FHA borrower.
Dominion Homes chairman and chief executive officer Douglas G. Borror said he expects higher default rates because his company sells to a broad market that includes people with poor credit histories.
‘‘We have worked very hard to expand that market, to provide houses to people who previously had not been able to have new homes," he said. ‘‘These people are not of the same credit quality, the same earnings level, the same understanding of credit as people in other parts of town."
Even so, Borror said, most Dominion buyers ‘‘have been successful in their purchase. We’re providing a benefit and value to the city of Columbus."
He also stressed that his company operates within the law and remains in good standing with HUD.


Yet Dominion’s default rate and the critical HUD audits should raise concerns at the FHA, said Nicolas Retsinas, a former FHA commissioner who now directs Harvard’s Joint Center for Housing Studies.

‘‘They weren’t put on a watch list?" he asked. ‘‘That’s surprising. That should merit scrutiny."


Audit violations
Five years ago, Dublin-based Dominion Homes expanded into the largely unregulated arena of mortgage brokering.

Its mortgage division, Dominion Homes Financial Services, acts as matchmaker between its customers and eight lending partners. As the broker, Dominion offers special interest-rate deals and down-payment assistance. Dominion recovers those costs by building them into the price of its houses.

The company controls the construction, price, sale, loan-application process and closing. Private lenders provide the cash.

Though legal, the arrangement bothers some in the industry. ‘‘Nobody’s looking out for the buyer," Columbus appraiser Lori J. Austin said.
Many in real estate agree that the cleanest sales happen when buyers hire attorneys, and lenders, appraisers and title agencies work independently.

An undisclosed connection between Dominion Homes and a title agency, for example, caught the eye of HUD auditors.


The Dispatch used the federal Freedom of Information Act to obtain audit reports of central Ohio builders with mortgage divisions. HUD audits mortgage lenders every two years.

In 2002 and 2004, HUD randomly selected 42 Dominion loans and found violations in 22 cases, some of which had more than one problem:

• The builder didn’t tell buyers in 20 cases that it was part owner of Alliance Title, a violation of the federal Real Estate Settlement Procedures Act. The company now discloses the connection.

• In one case, Dominion used a $5,000 bonus to qualify a borrower without evidence that the buyer had received such bonuses in the previous two years or had a ‘‘reasonable prospect" of continuing to receive them in the future. Without the bonus income, the borrower didn’t meet HUD standards.

• In another case, Dominion couldn’t document how a borrower was able to pay nearly $2,000 to close a loan. The borrower’s bank account, opened about a month before closing, had a balance of $750.

• In six other cases, Dominion didn’t prove that its customers had steady jobs or sufficient incomes to afford a mortgage. Auditors noted that one couple received a loan in 2003 despite ‘‘an unstable work history and minimal earnings for both borrowers." The audit did not indicate how much money the couple borrowed.
‘‘We do everything in our power to follow all the rules," Borror said.
A computer program analyzes buy ers’ income, debt and credit standing to determine whether they meet standards — largely replacing the underwriters who scrutinized loan applications in years past.
‘‘We don’t set policy on how government loans are made," Borror said. ‘‘We sell homes to people who qualify."
The 2002 audit was resolved satisfactorily, HUD spokesman Lemar C. Wooley said.
But the 2004 audit report said that the problems were so serious that HUD refused to insure those loans. At the agency’s request, Wooley said, Dominion signed documents accepting financial responsibility if those houses go into foreclosure.


Dominion vice president Thomas L. Hart said the company never signed such an agreement, pointing to a May 2, 2004, letter from HUD that said the agency had ‘‘closed out all matters concerning Dominion Homes Financial Services’ portion of the review."

‘ We were fools ’
When the Alonsos walked into Dominion’s model home five years ago, they were, in most ways, typical customers: young, first-time homebuyers who needed an FHA mortgage.

They had no money for a down payment but good credit. He is a State Highway Patrol trooper, and she was about to graduate from school as a dental hygienist.

They relied on their Dominion salesman to determine what they could afford and arrange the details of their loan, including an interestrate buydown, a down-payment gift and an estimate on property taxes.

Once the terms were set, Dominion sent the Alonsos to one of its financing partners, Wells Fargo, to process the paperwork.

‘‘We were fools," Mrs. Alonso now says.
To qualify for a governmentbacked loan, borrowers need acceptable credit and steady income. The program allows them to carry more debt than private mortgages such as those secured by Fannie Mae.

So they are riskier loans, failing on average five times as often as conventional mortgages.

In Franklin County, Dominion trails only Colony Mortgage in the number of FHA loans originated in the past two years but leads in defaults.

‘‘We are a pioneer, leader and champion of developing affordable homes for people in areas of town that have socioeconomic challenges," Borror said.
‘‘We absolutely would have the highest percentage" of defaults, he said. ‘‘These are minorities. These are people that work at Wal-Mart. These are people who wouldn’t be able to afford a home" without Dominion.

Company executives downplayed the two-year default rate because it includes loans that may not ultimately end in foreclosure. They said they rely on quarterly snapshots of mortgage performance based on the rate of defaults and foreclosure claims paid by the FHA insurance fund.

That measure showed that on July 31, Dominion’s rate was 6.1 percent in Franklin County loans, compared to 2.5 percent for all lenders nationally.
Dominion executives said that a HUD memo directs them to use the quarterly report. They cited a 17-word footnote offering guidance on using the quarterly measure.

However, the seven-page memo focused on a broader measure that tracks defaults during the first two years of government-backed mortgages.

‘‘HUD has specifically admonished us not to rely upon that as an indicator," said Nancy Doran, senior vice president of Dominion Homes Financial Services.
HUD relies on more than a quarterly snapshot to monitor mortgage defaults, said William Glavin, special assistant to the FHA’s assistant secretary for housing in Washington, D.C.

‘‘If the default rate is twice as high for the area, we can take action," he said.

M/I Homes says the two-year figure provides a fuller mortgage picture.
‘‘That’s what we look at, and that’s what HUD looks at," said M/I Financial president Paul S. Rosen, who has worked with FHA loans for 30 years.


Mortgaged to the hilt
The Alonsos visited the Galloway Ridge model homes in 2000 on the advice of a friend. They didn’t know how much they could afford. Nor did they have a finance plan.

They fell in love with one model’s vaulted ceilings, open floor plan and loft.

But they didn’t want to act impulsively. They needed to sleep on the decision and talk to their parents. So they returned the following day, ready to buy.

The Dominion salesman ran the Alonsos’ credit. They said he told them they could afford $191,000, tops.

After settling on upgraded flooring, electrical outlets and ceiling fans, the couple borrowed $187,500 with Dominion’s special financing package: an interest-rate subsidy called a 2-1 buy-down.

Buy-down loans are 30-year, fixedrate mortgages in which the seller pays 2 percentage points of the interest rate the first year and 1 point the next. The buyer pays full interest beginning in the third year. With lower first-year payments, buyers can more easily qualify for a mortgage that otherwise would be out of reach.

‘‘The guy selling the house broke down the payments," Mr. Alonso said.
He showed them that their monthly payment, including mortgage insurance and property taxes, would be $1,113 the first year, $1,230 the second and $1,353 the third, according to their sales documents.

Buy-downs encourage borrowers to stretch financially and bank on annual pay raises.

Most buyers don’t understand, however, that the builder isn’t discounting anything, said Cynthia A. Flaherty, director of the Central and Southern Ohio Partnership Office of Fannie Mae.

‘‘The builder has built it into the cost of the loan," she said.

Dominion adds the costs of buydowns into every house it builds, whether or not buyers use the incentive.

‘‘Anything you buy on credit in this country, you’re paying for the financing of it," Hart said. ‘‘That’s called American financing. It’s the same way cars are financed, and refrigerators."

Buy-downs are included in about 95 percent of Dominion’s FHA loans.

‘‘Upfront, they’ve got a payment they can handle," said Christopher J. Spiroff, a bankruptcy attorney who has represented several Dominion homeowners.

By the third year, when the buydown expires, homeowners typically also are hit with a significant increase in property taxes.

‘‘Our policy has always been to accurately reflect property taxes," said Doran, who joined Dominion in March.

All buyers signed disclaimers that said their property taxes could be higher than estimated.

Property taxes and the end of the buy-down squeezed the Alonsos’ budget so hard that they refinanced. Their mortgage payment jumped $400, to almost $1,800.

‘‘I about croaked," Mrs. Alonso said.
Increasing property taxes delivered the final blow to former Galloway Ridge homeowners Mary and Shawn Kendig. Mr. Kendig worked as a telephone installation technician and held a part-time job at a restaurant.
The couple, working without a real-estate agent, bought a Dominion house in 2001.

They decided on their own that they would not spend more than $140,000 but ended up with a house for $181,900, borrowing almost four times the family’s annual income.

‘‘The person we worked with was so bubbly and nice," Mrs. Kendig recalled. ‘‘I kept thinking, ‘Obviously, they wouldn’t give us money for something we couldn’t afford.’ "

Mrs. Kendig said the saleswoman, paid by commission, told the couple that their monthly payment never would exceed $1,200. The Kendigs said they didn’t understand how property taxes could push their payments higher, even though they signed the form disclosing that their taxes could increase.
On the Kendigs’ Good Faith Estimate and the Real Estate Tax Disclosure forms, Dominion estimated taxes would cost the couple $120 a month. The Kendigs signed off on using that estimate to qualify the couple for a loan.

Taxes ultimately cost about twice that.
A HUD study released in March concluded, in part, that underestimating property taxes adds to the risks of default.

By the end of the Kendigs’ second year in their house on Weston Woods Road, the full property taxes had kicked in and the couple’s monthly mortgage payments had reached $1,545. They tried to stay afloat with loans from check-cashing stores.

‘‘The foreclosure almost became a relief," said Mrs. Kendig, 34. ‘‘I had been so stressed out for six months."
The couple and their sons, ages 5 and 7, moved to a rented house on the North Side. Their landlord wouldn’t accept personal checks from them.


On the brink
The Alonsos had lived in Galloway Ridge six months when the first house in their subdivision sold at a sheriff’s sale. Three months later, a second house went to auction.

They thought those were isolated cases.
Then the orange labels turned up on their street, marking their former neighbors’ houses as ‘‘Property of the U.S. Government."

Half of the houses on the Alonsos’ street have since slipped into foreclosure. Another eight neighbors who live behind them and seven who live around the corner either filed for bankruptcy or went into foreclosure.
Exactly how many Dominion homeowners in Franklin County have faced financial distress is hard to document. There are ways other than foreclosure or bankruptcy to lose a house, such as having the lender buy it back at a lower price. No agency tracks those losses.

As of Aug. 31, 61 of 641 Galloway Ridge homeowners had faced foreclosure.
Half of the Galloway Ridge residents who fell into foreclosure also filed for bankruptcy, typically a lastditch effort to delay the inevitable loss of a house by as much as a year.
Records of sheriff’s sales and bankruptcy filings show that nearly one in six Galloway Ridge homeowners has faced foreclosure, bankruptcy or both.

‘‘Galloway Ridge is a good case study. That is a phenomenon of the macro-economy," said Hart, the Dominion vice president. ‘‘It’s divorce. It’s job loss. It’s taking out second mortgages. Some people buy a boat."

Of the 96 Galloway Ridge homeowners in bankruptcy, foreclosure or both, seven divorced, 34 had second mortgages and one woman owned a boat: a 6-foot canoe.

‘‘This is a neighborhood filled with distress," Franklin County Treasurer Richard Cordray said. ‘‘The consequences are bad. Wow."
Many homeowners across Franklin County are struggling to keep their homes.

‘‘There’s a lot more people near foreclosure than in foreclosure," said Samuel Gresham Jr., outgoing president of the Columbus Urban League, which this summer organized a group of government and banking officials to examine the growing problem.

Financially distressed homeowners face years of turmoil when buying car insurance, renting an apartment and finding a job, Cordray said.
Schools, fire and police departments, and cities lose because of unpaid property taxes and depressed house values. They also lose when residents vote against issues that would raise taxes and push them closer to disaster, he said.

Lawyers, government officials and financial experts predict a surge of bankruptcy filings and foreclosures before new federal regulations take effect next month. Under the new law, most people won’t be able to just walk away — debts will remain with them.
‘‘It’s their last chance," Treasurer Cordray said.

Those left behind — those who are financially secure — are stuck.

‘‘Every community we do, we hope is a longtime success, but that is not a guarantee," Dominion’s Hart said.
The Alonsos, who expected to lose their fourth neighbor through a sheriff’s sale on Friday, have accepted their circumstances, for now.

‘‘What else can we do?" Mrs. Alonso said. ‘‘I guess just pray the neighborhood turns around."

The couple learned just how stuck they are when they put their home up for sale last year. They first listed the immaculate 1,800-square-foot house for $217,900. Then $210,000. Then $199,900. Now, they’ll take $189,900 — exactly what they paid in 2001. But if they’re serious about selling, their real-estate agent told them, they should shave off another $30,000. News researcher Emily Glenn contributed to this story. jriepenhoff@dispatch.com fsquillante@dispatch.com

Brokered Dreams Series

The Columbus Dispatch