Dominion Homes leads the state in FHA mortgage defaults 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. Dominionâs 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 Columbus Dispatch 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 canât 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 â now â 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: ⢠Dominionâs 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 Dominionâs customers in Franklin County have fallen more than three months behind on their FHA mortgages in their first two years of homeownership. Thatâs nearly 2½ times the national figure. At least half of Dominionâs customers have government-backed mortgages. ⢠Nearly a third of the Franklin County houses and condominiums built since 1998 that have been listed for sheriffâs 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. ââWe 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. ââThese 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 ââhave been successful in their purchase. Weâre 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 Dominionâs default rate and the critical HUD audits should raise concerns at the FHA, said Nicolas Retsinas, a former FHA commissioner who now directs Harvardâs Joint Center for Housing Studies. ââThey werenât put on a watch list?" he asked. ââThatâs 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. ââNobodyâs 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 didnât 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 ââreasonable prospect" of continuing to receive them in the future. Without the bonus income, the borrower didnât meet HUD standards. ⢠In another case, Dominion couldnât document how a borrower was able to pay nearly $2,000 to close a loan. The borrowerâs bank account, opened about a month before closing, had a balance of $750. ⢠In six other cases, Dominion didnât 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 ââan unstable work history and minimal earnings for both borrowers." The audit did not indicate how much money the couple borrowed. ââWe do everything in our power to follow all the rules," Borror said. A computer program analyzes buy ersâ income, debt and credit standing to determine whether they meet standards â largely replacing the underwriters who scrutinized loan applications in years past. ââWe donât set policy on how government loans are made," Borror said. ââWe 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 agencyâs 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 ââclosed out all matters concerning Dominion Homes Financial Servicesâ portion of the review." â We were fools â When the Alonsos walked into Dominionâs 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. ââWe 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. ââWe are a pioneer, leader and champion of developing affordable homes for people in areas of town that have socioeconomic challenges," Borror said. ââWe absolutely would have the highest percentage" of defaults, he said. ââThese are minorities. These are people that work at Wal-Mart. These are people who wouldnât 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, Dominionâs 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. ââHUD 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 FHAâs assistant secretary for housing in Washington, D.C. ââIf 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. ââThatâs what we look at, and thatâs 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 didnât know how much they could afford. Nor did they have a finance plan. They fell in love with one modelâs vaulted ceilings, open floor plan and loft. But they didnât 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 Alonsosâ 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 Dominionâs 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. ââThe 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 donât understand, however, that the builder isnât discounting anything, said Cynthia A. Flaherty, director of the Central and Southern Ohio Partnership Office of Fannie Mae. ââThe 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. ââAnything you buy on credit in this country, youâre paying for the financing of it," Hart said. ââThatâs called American financing. Itâs the same way cars are financed, and refrigerators." Buy-downs are included in about 95 percent of Dominionâs FHA loans. ââUpfront, theyâve 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. ââOur 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 Alonsosâ budget so hard that they refinanced. Their mortgage payment jumped $400, to almost $1,800. ââI 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 familyâs annual income. ââThe person we worked with was so bubbly and nice," Mrs. Kendig recalled. ââI kept thinking, âObviously, they wouldnât give us money for something we couldnât afford.â " Mrs. Kendig said the saleswoman, paid by commission, told the couple that their monthly payment never would exceed $1,200. The Kendigs said they didnât understand how property taxes could push their payments higher, even though they signed the form disclosing that their taxes could increase. On the Kendigsâ 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 Kendigsâ second year in their house on Weston Woods Road, the full property taxes had kicked in and the coupleâs monthly mortgage payments had reached $1,545. They tried to stay afloat with loans from check-cashing stores. ââThe foreclosure almost became a relief," said Mrs. Kendig, 34. ââI 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 wouldnât 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 sheriffâs 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 neighborsâ houses as ââProperty of the U.S. Government." Half of the houses on the Alonsosâ 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 sheriffâs sales and bankruptcy filings show that nearly one in six Galloway Ridge homeowners has faced foreclosure, bankruptcy or both. ââGalloway Ridge is a good case study. That is a phenomenon of the macro-economy," said Hart, the Dominion vice president. ââItâs divorce. Itâs job loss. Itâs 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. ââThis is a neighborhood filled with distress," Franklin County Treasurer Richard Cordray said. ââThe consequences are bad. Wow." Many homeowners across Franklin County are struggling to keep their homes. ââThereâs 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 wonât be able to just walk away â debts will remain with them. ââItâs their last chance," Treasurer Cordray said. Those left behind â those who are financially secure â are stuck. ââEvery community we do, we hope is a longtime success, but that is not a guarantee," Dominionâs Hart said. The Alonsos, who expected to lose their fourth neighbor through a sheriffâs sale on Friday, have accepted their circumstances, for now. ââWhat else can we do?" Mrs. Alonso said. ââI 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, theyâll take $189,900 â exactly what they paid in 2001. But if theyâre serious about selling, their real-estate agent told them, they should shave off another $30,000. News researcher Emily Glenn contributed to this story.
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