Timothy Lewis knew he could not save the house. So when the foreclosure notice came, he packed. Boxes of belongings line one wall of his living room. Christmas wreaths and wrapping paper poke from a bin nearby. Two weeks later, the room already looks empty.

Lewis, a 43-year-old craftsman who makes house doors for a living, can no longer afford the ranch house he bought with help from the Federal Housing Administration. He calls it the last casualty of an 18-year marriage that ended. He plans to live with his mother, then maybe his son.

"I just can't make it. The mortgage is too big," he said. "It's so far behind now, I'd need $15,000 to save it."

For five straight months, Colorado has had the highest home foreclosure rate in the nation.

A key factor in the state's record-setting wave of foreclosures, critics say, is an FHA program that allows people to borrow more than their houses are worth with little or no money down.

Created to extend the dream of homeownership to first-time buyers, the so-called FHA gift program instead has led to rampant foreclosures. Nearly 6,000 FHA loans have wound up in foreclosure in Colorado in the past two years, and during that time the program allowed more than 25 percent of FHA buyers to use gifts as down payments.

In Adams County, Lewis was one of 20 foreclosed homeowners with FHA loans in the first week of August alone. In neighboring Arapahoe County, 25 homeowners with FHA loans were foreclosed the same week.

In both counties, FHA loans account for about a third of all foreclosures. By contrast, the FHA insured only a fifth of Adams County home loans and a sixth of Arapahoe County home loans in 2004, a Denver Post analysis of federal data shows.

The foreclosure rate on FHA loans statewide has been rising steadily. In June, it was twice as high as in late 2003.

Federal officials blame Colorado's growing number of FHA foreclosures on broad economic factors such as a housing surplus, stagnant prices, layoffs and excessive home refinancing.

"Obviously, we feel the foreclosure rate is too high," said John Carson, Denver's regional director of the U.S. Department of Housing and Urban Development, which oversees the FHA.

Recent studies say HUD itself exacerbated the problem by sanctioning the gift program, which lets home sellers cover a required 3 percent down payment by routing it through a nonprofit organization.

The seller then typically raises his price to recoup the money. An appraiser OKs a slightly inflated house value. Closing costs and FHA insurance premiums get folded into the home loan, and the buyer ends up borrowing more than the house is worth. With no money invested in the house, the buyer has less incentive to try to make things work if the going gets tough.

"If it wasn't FHA, it would be fraud," said John Head, a Denver lawyer who represents victims of mortgage-fraud schemes.

On a house listed for $100,000, for instance, "the buyer in essence gets into a $106,000 house," said Jami McGinnis, a Pinnacle Mortgage underwriter who works on FHA loans in Colorado. "You're giving these people 100 percent financing with no recourse and a mortgage based on an inflated price."

Nationally, from 2000 to 2005, reliance on down-payment gifts from nonprofits jumped from 2 percent to 30 percent of all FHA loans. HUD estimates more than 90 percent of those "nonprofit" gifts actually came from home sellers. During the same period, the national foreclosure rate on FHA loans doubled.

"I really think it was the down-payment assistance programs that got FHA into trouble," McGinnis said.

HUD's Carson acknowledges problems have arisen with gift programs that "we're aware we need to address."

"Why, I don't know"

Timothy Lewis managed to scrape together a down payment when he and his wife bought a home in the tiny town of Henderson five years ago.

But from the start, he worried they had borrowed beyond their means with the blessing of the federal agency insuring the loan.

"I just barely got the house," he said. "I think people are borrowing more than they can afford and the banks are willing to do it. They gave me more money than I ever should have had. Why, I don't know."

To buy the house he is losing, Lewis said he participated in a down-payment

	Keith Wren, 49, clears his house of stuff accumulated over more than 40 years. Wren and his 47-year-old brother, Chris, are facing foreclosure on the Littleton house in which they grew up. They are trying to sell the house before the bank sells it at auction. (Post / Helen H. Richardson)

The buyer's agents "asked me to sell it for more," he said. He agreed to raise his price by $4,000 and donate an equal sum to a third party providing the buyer's down payment for an FHA loan.

The family "lost it a year later," Lewis said.

HUD's seller-assistance policy also enabled a woman who called herself Maria Guerra become a Colorado homeowner.

She chose a brick-and-wood house in suburban Northglenn with a white picket fence and a front yard shaded by a maple tree. The sale price was $188,500. Every penny of the 3 percent down payment that FHA required - $5,655 - came from a program that in turn collected the down payment plus $500 from the sellers, her loan documents show.

With all closing costs included, Guerra paid $407 - or less than a month's rent for most Denver-area apartments - to buy her first home in 2003.

Her loan papers included a resident alien card, a Social Security number, W-2 forms and an income history from a supervisory job at the Isle of Capri casino.

All were false. Her resident alien number had never been issued. Her Social Security number belonged to a woman in Illinois. Her W-2 forms were fabricated, and the Isle of Capri had never heard of her.

The fraud team that helped Guerra and hundreds of others get FHA-insured loans brazenly operated from a Re/Max office directly below the Colorado Bureau of Investigation.

In an investigation of real estate agents downstairs, CBI determined that in two years, they had sold at least 190 home loans to buyers with fictitious IDs and jobs. Many served French fries at fast-food counters, not gamblers at the Isle of Capri. Most relied on down-payment assistance programs to get FHA loans and homes with little or no money.

The perpetrators told investigators - and prosecutors agree - that the fraudulent tactics used to sell homes out of one Jefferson County real estate office were widespread in the Denver area. One government source estimates 20,000 illegal immigrants hold FHA-insured loans in metro Denver alone.

"That's probably a pretty good guess," said Jefferson County District Attorney Scott Storey, who prosecuted the team that sold Maria Guerra her home. "This was the tip of the iceberg."

The team commonly used FHA loans "because you can get in without any money," he said. "Through gifting programs, they inflate the appraisal a little bit. You walk into the closing, no money down. You walk out with a deed. Some even walked out with cash."

Seller pleads guilty

Guerra told investigators she had lived in the United States illegally since 1975, worked as a Family Dollar store manager and wanted to own a home. She insisted she never knew her loan papers showed a casino job worth more than $40,000 a year.

Guerra was never charged with a crime, although those who sold her the house pleaded guilty to fraud charges.

Of the 190 homes in the Jefferson County case, 69 have been foreclosed so far. Guerra lost hers. Others are still making mortgage payments on homes they obtained with fictitious names, imaginary casino jobs and down-payment gifts.

FHA lets relatives, friends or charities help a first-time home buyer come up with its required 3 percent down payment.

Its rules clearly state, however, that "the gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker." Yet sellers have provided the down payments for hundreds of thousands of FHA-insured home loans.

How?

HUD itself provided the tool to circumvent the rule. In 1998, its Office of General Counsel sanctioned down payments from "a seller-funded nonprofit" because the money did not come directly from the seller and was collected after the loan closing.

Nonprofits quickly proliferated, turning to sellers as the major source of down-payment gifts to buyers.

Two studies by HUD's inspector general suggested that a seller-assisted down payment doubled the risk of default - a loan at least three months in arrears. Similarly, the General Accounting Office reported that seller- funded down payments "raised the probability of delinquency by 93 percent."

Nationally, delinquency rates on FHA loans have surpassed even high-interest subprime loans for three years,

	The Adams County Sheriff's Office emptied this Thornton house after it went into foreclosure - and changed its locks. Neighbors said the items had been outside for at least three days. (Post / Helen H. Richardson)

FHA has been able to cover its losses with buyers' mortgage-insurance premiums, which include a 1.5 percent surcharge on the purchase price. But the GAO, noting that FHA had raised its loss estimates by billions of dollars, recommended eliminating seller-funded down payments that are "effectively circumventing" its own rules.

Meanwhile, the Internal Revenue Service is investigating whether 185 down-payment assistance programs nationwide qualify as charities.

In the Denver area alone, records show, at least three down-payment assistance programs that registered as charities had officers or agents who held real estate licenses.

A struggle to keep home

For Marilyn Taylor, buying a home in Arapahoe County was easy. With down-payment assistance, she said she needed less than $200 to get the condo.

Keeping it has been a struggle. The man she married in 2004 suffered a stroke six months later, and "we were paying $2,000 a month for home day care. We just ran out of money," she said. "If it weren't for God, I know I would have lost my mind, I really would."

Taylor, who works in collections for a health-care chain, said she pays her bills and aims to stave off the foreclosure.

"You work all your life, just one thing can happen - and boom," she said.

Maria Inez Hernandez and her husband, Vicente Pina, are losing the Aurora home they bought five years ago with a fixed interest rate and a 3 percent cash down payment for an FHA loan.

She worked as a seamstress, he as a construction foreman. They hoped to bring Vicente's children from Mexico to live with them.

It never happened. He lost his job last year, then returned to his children in Mexico after his mother died. This year she lost a job assembling jackets when her employer moved much of its work to China. She tried to sell her home, could not get what she owed and moved in with her cousins two blocks away. The Arapahoe County foreclosure notice came to an empty house.

"There are things that aren't in our control, like health and work," Hernandez said.

From her front steps on West Dakota Avenue, Kathleen Dias can see six homes that were foreclosed. Her Denver neighborhood has been devastated by 26 foreclosure notices on four blocks of her street. Nearly half came to people who bought homes with FHA loans, including three to the couple who recently moved out next door.

The foreclosures, Dias said, have turned a close-knit community of homeowners who watched one another's children grow up into a place where vacant homes attract prostitutes, drug users and gunfire.

"I've never seen it this bad," she said. "Not like this year. Not like this year."

Staff writer Greg Griffin contributed to this report.

Staff writer David Olinger can be reached at 303-820-1498 or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . Third in an occasional series