"In an increasingly common scenario in Central Virginia, on Tuesday attorney John G. LaFratta stood on the steps of the Albemarle County Courthouse to auction off a foreclosed property.

Having fallen behind on mortgage payments, a Schuyler couple lost their 1,296-square-foot home, worth an estimated $134,000, in the foreclosure auction.

The number of foreclosures in the Charlottesville region has jumped dramatically, reflecting a trend seen both across Virginia and nationally.

“The problem is absolutely as bad as people are saying it is and it’s going to get worse,” said Michael Martin, loan officer and chief executive of Crown Mortgage Services in Charlottesville. “There’s some chickens coming home to roost.”

During the first three months of 2007, there were 128 notices of foreclosure filed with The Daily Progress, a 27 percent increase over the same period in 2006.

The number of area families who have fallen behind on mortgage payments appears to be even higher. The Piedmont Housing Alliance - which seeks to help homeowners keep their homes after they have defaulted on mortgage loans - has seen its number of clients skyrocket from one or two people per week in early 2006 to two or three per day so far in 2007.

“It’s really scary,” said Shelley Murphy, director of program services for the Regional Homeownership Center at PHA. “We’re having so many more clients come in that we’re almost not able to handle them all.”

To cope with the growing workload faced by housing counselors, supervisors like Murphy are taking on cases at the homeownership center.

“We’ve never seen so many cases,” Murphy said. “And they’re from all levels of income. It’s not just low-income folks - it’s everybody.”

The number of foreclosures statewide jumped by 137 percent during the first three months of 2007, compared with the first quarter of 2006, according to data compiled by foreclosure specialists RealtyTrac Inc.

A Richmond nonprofit agency, Housing Opportunities Made Equal, estimates that 10,000 families in Virginia will have lost their homes by the end of the year.

Lowering the bar

The rise in foreclosures is tied to the growth over the past few years in subprime lending, which allows borrowers with unfavorable credit scores to obtain home loans at a higher cost.

As the subprime lending industry exploded, lending companies began to relax their standards for who could borrow, allowing people who would not otherwise have qualified for a loan to purchase a home.

“There’s a lot of people out there who are in homes that really should never have been given a loan,” Martin said. “And it’s the people who are most vulnerable that have been taken advantage of. There’s a whole vulture system out there that preys on these people.”

Many of the homebuyers now in trouble financed their property purchase via an adjustable rate mortgage that has since reset under higher rates.

Over the past two years, the index upon which most two-year adjustable rate mortgages are based has increased from 1 percent to 5.5 percent. As a result, monthly mortgage payments for many homeowners have ballooned.

Some homebuyers saw adjustable rate mortgages as the only path to homeownership in the Charlottesville-area housing market, where the median housing cost was $289,900 in 2006.

With higher monthly housing payments, homeowners can be forced to make a choice between paying off the mortgage, medical bills, credit cards, utility bills, college tuition or other expenses.

“The biggest expense people have is their rent or their mortgage,” Murphy said. “So when something happens, lots of people stop payments on that first. We advocate for people to pay off their housing costs first, then everything else second.”

Nationally, the rise in foreclosures may pose a threat to the country’s housing market and the overall economy, said William Shobe, research director at the Weldon Cooper Center for Public Service at the University of Virginia.

“The aggregate picture across the country is going to determine if we’re going to have a recession,” Shobe said.

Some skepticism

Phil d’Oronzio, president of the Central Virginia Mortgage Professionals and principal of Pilot Mortgage in Charlottesville, is skeptical that a high number of residents are losing their homes.

When a homeowner goes into default on a loan, both the mortgage lender and the borrower will typically negotiate an agreement before it gets to the point of foreclosure, he said.

To initiate foreclosure proceedings on a property, it typically costs between $10,000 and $20,000. Plus, the last thing a bank wants is to have a portfolio full of foreclosed real estate property - particularly in a softening housing market, he said.

“While foreclosures might be up a bit, it’s not quite the historic panic that people think,” d’Oronzio said. “Lenders are very eager to cooperate and do everything they can not to foreclose because they don’t want to be in the real estate business.”

Yet d’Oronzio added that many factors are stacking up to spark a rise in loan defaults, such as the growth in adjustable-rate mortgage packages and the increase in mortgage lending to risky borrowers.

“In some scenarios, to use a cliché, it’s a bit of a perfect storm,” he said.

Assessment boom

Troy Johnson, of Absolute Appraisals in Charlottesville, assesses the value of properties on behalf of lenders and mortgage brokers after a homeowner goes into default on a loan.

In recent months, Johnson said, his firm’s business has increased substantially.

“Last year we were getting hired on these jobs once every two months or so. Now it’s about one every week,” he said.

Johnson said he has also observed that more homeowners who took out home equity lines of credit to pay for renovations, college tuition, new appliances or other big-ticket items in 2004 or 2005 are now finding themselves stuck with homes that are actually worth less than their total loan amount.

“People are upside down in their own houses, so to speak,” he said.

When a homeowner begins to miss mortgage payments, his bank will send a letter notifying him that he is in default and should contact one of the region’s two certified housing counselors, the Piedmont Housing Alliance or the Monticello Area Community Action Agency.

Upon receiving the letter, a homeowner should call a housing counselor as soon as possible, Murphy said, because the later a borrower in default waits to fix the problem, the greater the chance that he will lose his home.

“If you’re in trouble with your mortgage, you gotta make that call quickly,” she said. “If we’re able to stop foreclosure, we do. But we don’t get them all, unfortunately.”" (Brian McNeill, The Daily Progress, May 27, 2007)