By Dina ElBoghdady and Sarah Cohen
Washington Post Staff Writers
Saturday, January 17, 2009; A01

Before Robin Bohnen and her husband, Shane, bought a $1.16 million Mediterranean-style house in an upscale Southern California suburb two years ago, they were not cash-strapped, debt-ridden or credit-impaired.

Now they are all of the above. Soon they also may qualify for one more distressing category: home lost to foreclosure.

"Wake me up, can this really be happening?" the 42-year-old Bohnen says. As she tries to describe how it feels to have the nation's financial crisis land in her living room, the phone rings. She ignores it. "It's probably the bank -- again," she says.

Bohnen once owed her comfortable lifestyle to the dizzying growth that transformed Southern California over the past decade, creating a boom that led many to believe their home values would keep climbing. As the owner of a furniture store born during the housing boom, she provided bean bag chairs and bedroom sets for the brand-new communities that easy credit built.

Now, she and husband just owe. They cannot afford their $6,400 monthly payment, and in this plummeting market, they wouldn't make enough on a sale to pay off their mortgage or recoup the 20 percent they put down to buy their Riverside County home.

They're "underwater," industry parlance for borrowers who owe more on their mortgage than their houses are worth. They have joined the growing line of homeowners seeking a break from their lenders.

Both the departing and incoming administrations in Washington have promised help on the foreclosure front, but providing help requires federal regulators to get their collective arms around the size and shape of the crisis. That isn't easy. No one agency collects information on every loan, every borrower and every delinquency.

But interviews and a Washington Post analysis of available data show that the foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up. They don't have subprime loans, the lending industry's jargon for the higher-rate mortgages made to borrowers with shaky credit or without enough cash for a down payment.

The wave of subprime delinquencies appears to have crested. But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post's analysis.

This trend shows up most acutely in California and other high-growth regions, such as Arizona, Nevada, Florida and pockets of the Washington region, most notably in Prince William and Prince George's counties.

The recession has made it tougher for people to pay their mortgages, and crashing home prices have left many borrowers underwater, unable to sell or refinance their way out of trouble. One of every five mortgage holders now has a home worth less than the mortgage on it, according to First American CoreLogic, a firm that tracks mortgages and provided data for The Post's analysis.

Of the 20 Zip codes with the highest share of underwater loans, seven are in California and four are in Riverside County, the vast exurb southeast of Los Angeles where the Bohnens live. Riverside's unemployment rate has zoomed to 10 percent, well above the national average of 7.2 percent. About 94,200 people in the county are looking for work, many of them formerly employed in the real estate, banking and construction industries, according to the county's economic development agency.

The foreclosure crisis hasn't played itself out. The next wave looms in the form of a new batch of adjustable-rate mortgages scheduled to reset over the next two years. Unless the market comes back with a roar, which is unlikely, more borrowers will struggle to hang on to their homes.

Southern California was the epicenter of the housing bubble, in many ways. Four of the largest lenders had offices there, and Riverside County became a showcase for how communities can create wealth through real estate. Now the county is a case study of what can happen when the only industry in town is growth itself.

"These economies were self-feeding off the housing boom. And when the boom went bust, there was no safety net to fall back on," said Sean Snaith, an economist at the University of Central Florida's business school.

After the technology stock bust of 2001, which hit California and its sun-kissed regions particularly hard, investors and consumers sunk their money into real estate. Some wanted high returns. Others sought the perceived safety.

"They thought housing was a sure thing because there had never been, since the Great Depression, a sustained drop in housing prices," said Alan Blinder, former vice chairman of the Federal Reserve and now a professor at Princeton University. "There had been isolated drops in certain geographies, but not across the nation."

The federal government played a central role in the boom. The Fed cut a key short-term rate to rev up the economy following the tech bust, enabling lenders to borrow money at low rates, lend that cash to home buyers at higher rates and then sell the mortgages to other institutions, said Esmael Adibi, an economist at Chapman University, south of Los Angeles.

"The lenders had ample amounts of money, and they needed customers," Adibi said. "The best places to find customers were areas with expensive housing, where people had a hard time using traditional mortgages that required a 10 to 20 percent down payment."

Some of the priciest real estate was in California, making it a natural base for the busiest lenders, including New Century Financial and Ameriquest Mortgage, both defunct; Countrywide, which Bank of America has bought; and IndyMac, a Pasadena-based bank taken over by the federal government last summer and recently sold to a group of private investors.

"These companies spread their wings in California and then moved on to other parts of the country, such as Las Vegas, Phoenix and southern Florida," Adibi said.

In Las Vegas and Florida, speculators and second-home buyers snapped up properties as fast as anyone could build them. In California, buyers competing for a bit of coastal real estate drove prices to levels beyond most people's reach, said Albert Saiz, a real estate professor at the University of Pennsylvania's Wharton school. Buyers frozen out of those markets moved further inland, to areas such Riverside County, where land was plentiful. "That demand translated into new construction," Saiz said.

In 2005 and 2006, more than half the homes sold in Southern California were in Riverside and neighboring San Bernardino County, pumping thousands of new jobs into the regional economy, said John Husing, an independent economist. "Real estate became what gold was to the gold mining towns," he said. "Everyone's job was tied to the mine, whether they realized it or not."

By early 2006, the construction sector comprised about 11 percent of Riverside County's job base -- more than double what it was two decades earlier, according to Beacon Economics, a California research firm.

For a brief time in 2005, the housing market showed signs of cooling nationwide and interest rates edged up. Lenders reacted by reaching out to even riskier borrowers with more subprime and other exotic loans to keep the home-buying frenzy going, said Howard Shapiro, an analyst at investment bank Fox-Pitt Kelton.

Some lenders wooed borrowers with generous terms once reserved for the most creditworthy. Mortgage financiers Fannie Mae and Freddie Mac, eager to profit, started buying more of these loans -- in effect, subsidizing the market.

Blinder used the Wile E. Coyote character in the old Road Runner cartoons to explain what happened to prices next: "The coyote is running, running until he runs off the mesa, suddenly he's out there in thin air and stays there for a while -- then crash," he said.

The markets that crashed the hardest were the ones where prices had climbed the fastest.

On a drive through Riverside County, it's easy to spot the foreclosures: Green lawn. Green lawn. Green lawn. Brown lawn.

The grass doesn't get watered when incomes dry up, mortgage payments stop and families move out. Robin Bohnen can see patches of brown from her house. A neighbor to her right and another to her left lost their homes in the past year. Her arms flail as she describes life in a financial vise.

The home to the left is listed for $699,900 and the other for $725,000. She and her husband owe $932,000 on their house, so they're facing at least a $200,000 shortfall. That's not what they expected when they bought their home two years ago. The economy looked good then, the housing market was still thriving and the house seemed like a steal. It was the cheapest available in the exclusive gated community that they had been eyeing for some time.

A lender offered them a mortgage that allowed them to pay interest only for the first five years. They were not asked to document their income, which put their mortgage into the class of loans known as "Alt-A," so called because they are an alternative to a prime (or A) mortgage.

It turned out to be a risky decision. What galls the Bohnens is that they brought $233,000 to the table when they bought the house -- cash they had pulled out of their previous home, which was under contract for sale. But the sale fell apart just before the scheduled closing date, and while the agent was confident of finding a new buyer at the time, the house never sold. It is now in foreclosure.

As the housing market tanked, so did their income. Robin Bohnen's three-year-old furniture franchise couldn't make it without a steady supply of new homeowners, so she gave it up. Her husband, who had earned hundreds of thousands of dollars in yearly commissions selling law-enforcement equipment, was hurt indirectly: His main employer cut him loose after several California cities, pinched by declining property tax revenue, cut back on buying police gear.

Bob Livingston, a real estate agent and friend of the Bohnens, tried to sell the house.

"I couldn't," he said. "Everyone looked at it and wanted to pay foreclosure prices."

Now the Bohnens are tapped out. They missed their third mortgage payment yesterday and can barely keep up with their homeowner association dues. Their twins are in college and their 4-year-old in day care. They're working with a housing counselor to try to modify their loan.

"We have no equity, just debts," Robin Bohnen said. "We've maxed out our credit cards and gone through all our savings and retirement accounts."

Once equity vanishes, income matters far more than the kind of mortgage a borrower has. Luke Rizzo, another Riverside County homeowner, took out a 30-year, fixed-rate mortgage in 2003. He put down $125,000, but he, too, is teetering on foreclosure's edge.

In 2006, Rizzo lost his job as an information technology manager at Lockheed Martin and sunk deep into credit card debt as he tried to keep up with his mortgage payment. He bought the house for $460,000. The house next-door recently sold in foreclosure for $340,000. His debt has climbed to $498,000 because he took out a $200,000 home-equity line. That money was spent on landscaping and living expenses.

Rizzo's lender initiated foreclosure six months ago but recently rescinded the action without explanation. Rizzo is confused. He and his wife have started packing, just in case. "When you have a $2,800-a-month mortgage," said Rizzo, who has found work as an electrician, "it doesn't take much to get behind."

Against this backdrop of plunging values, some homeowners are dumping their homes even if they can make the payments, real estate agents and lenders said. A California lawyer even launched an online calculator, www.payorgo.com, to help borrowers decide.

"There's this easy come, easy go mentality," said Mike Novak-Smith, a real estate agent in Moreno Valley, a working-class part of the county. "Some people would rather hold onto their pickup truck or Mercedes than their homes."

In 2006, about 25 percent of Riverside County home buyers took out loans without making a down payment, according to SMR Research, which analyzes mortgage data. For those borrowers, Novak-Smith says, their loan payments are akin to rent: They essentially have no stake in their homes, which makes walking away easier.

"So they get a ding on their credit record. No big deal," he said. "They wait a few years and buy again."

Diolinda Igma, a real estate agent in Riverside County, went through this calculation before she and her husband, who works for a public utility, stopped making payments on their Moreno Valley home. They were underwater on their adjustable-rate mortgage, due to reset in 2010.

Because most lenders will not modify a loan until the borrower has missed payments, Igma said she fell behind to get her lender's attention. "I had to be practical," she said. "Why wait for 2010? Why keep putting money into a house we'll lose?"

The Igmas took out two loans to buy their $437,000 house. The second enabled them to buy without putting money down.

After Igma missed five payments, her lender came through. The bank lowered the interest on the first loan from 5.5 percent to 3.5 percent and extended the life of the loan to 40 years from 30. The lender added the missed payments to the loan. If not for that, the couple was prepared to move back into their much smaller first home, which they have been renting out.

The decision to walk away involves a mix of emotions and pragmatism. People get angry when they see a neighboring house in foreclosure sell at a deep discount, said Carri Clark, a mortgage broker at Mortgage Tree Financial in the city of Riverside. They see their home value eroding and their equity disappearing, but their mortgage payment remains the same.

"I had one the other day and she's telling me, 'We're going to buy this other house and let the one we've got go because it's a money pit," Clark said. "They have three homes, including a vacation home and rental property. . . . I keep telling people: 'You signed a promissory note. You told the bank you'd pay it back. It's like marriage. It's for better or worse.' "

For all those reasons, Carol Byrd, a real estate agent, does not want to walk away from her home. But she will if she has to, she said.

Three years ago, Byrd bought a home for $525,000, in the city of Riverside, getting a no-money-down mortgage. Back then, she was selling 50 homes a year and earning roughly $350,000 annually.

Byrd makes nothing close to that now, but her lender thinks the potential for that income is still there. To keep her in the mortgage, the lender has agreed to postpone her foreclosure until August and defer half of her payment, a temporary savings of $1,600 a month. The unpaid portion will be tacked onto future payments.

Byrd said the arrangement would not work long term. She wants her loan modified to reflect the current value of her house -- about $250,000. If not, then she's at peace with the consequences.

"If I have to rent, I have to rent," she said. "It's not the end of the world."

Federal regulators recently held a one-day seminar in Riverside for troubled IndyMac customers interested in a loan modification. About 4,200 were invited. Only 250 showed up, half of whom probably will not qualify for a more affordable loan.

The turnout underscores a common complaint from lenders, who say many struggling borrowers do not respond to outreach efforts and when they do, they come with inflated notions about what can be done.

"They think it's 'Let's Make a Deal,' but it's not," said Evan Wagner, an IndyMac spokesman.

Wagner ticks off some memorable ones: The couple who rejected several offers even though they were 10 months delinquent. The investor who owned four properties but refused to sell any at a loss to help save her primary residence. The borrower who was approved for modification but was disappointed that IndyMac couldn't help with his credit card debt.

IndyMac specialized in Alt-A loans. The unraveling of this type of loans has devastated several other large lenders, including Countrywide and Washington Mutual.

Initially, Alt-A loans catered to financially sophisticated borrowers with strong credit scores and hefty down payments who would not or could not document their income or assets. People who were self-employed or whose income fluctuated paid higher rates to take out these no-hassle loans.

For years, Alt-A loans performed as well as prime ones, reinforcing the idea that income hardly mattered if a borrower had good credit, said Dave Stevens, a former Freddie Mac official and now president of Long & Foster.

"We had a period of time with ever-improving housing market conditions and there was no history of default to look back on," Stevens said. "Every year, the investors and lenders were proved right, that certain people did not need to document their income, so the lenders started becoming more lenient."

Increasingly, Alt-A mortgages came to be known as "liar loans" because so many lenders and borrowers did not provide accurate income data. Lenders also took on more risky borrowers and aggressively marketed Alt-A loans, including option adjustable-rate mortgages like the one Byrd used to buy her home.

Byrd's loan, which came with a 1.5 percent teaser rate for the first five years, let her decide how much to pay each month. Most borrowers who took out these option ARMs from 2004 to 2007 chose to pay no more than the teaser rate. They can keep doing so until their interest rate adjusts or they reach a certain percentage of the principal (10 to 25 percent, depending on the lender).

The excess money they owe is added to their balance so that they owe more than they borrowed on the house. Fitch Ratings expects monthly payments to jump 63 percent on average (or $1,053) on loans adjusting in 2009 and 2010, which will undoubtedly cause a rise in defaults.

Already, 24 percent of option ARMs were at least two months late in September, up from 5 percent a year ago, said Mahesh Swaminathan, a Credit Suisse mortgage strategist.

"We're seeing delinquencies rise even before the recast date has hit," Swaminathan said. "After the recasts, the weakness will increase. In 2010 and 2011, the recasts will peak."

Robin Bohnen hit a wall when she sought to modify her loan. The lender told her it would not rework loans that are not adjusting immediately, she said. Her Alt-A loan doesn't reset until 2011.

Shane Bohnen lets his wife deal with the lender. He was reluctant to speak for this story. He figures no one will have any sympathy for a family living in a $1 million house.

"We came in with eyes wide open," he says, standing in the kitchen. "We knew what kind of loan we had."

"Oh, really," Robin Bohnen says. She darts him a look from the living room couch before launching into a series of questions that gives some hint of the tension that inevitably comes with financial trouble.

"Did you know that the housing market was going to collapse?" she says to her husband. "Did you know I was going to lose my store? Did you know you were going to lose your job? Come on. There was no reason to believe any of this would happen. It's not like we did anything impulsive. You've been doing this job for 10 years and making good money."

"Twelve years," he said. "It's been 12 years."

And he walked away. The conversation was over, for now.

Minutes later, the phone rang again, a reminder that for the Bohnens, the end was nowhere in sight.