Editor's note: This is the first in a series of stories about how the recession has affected the lives of Northern Shenandoah Valley residents.
By Garren Shipley -- firstname.lastname@example.org
Penelope Saville worked three jobs for years to get her finances back in order after a divorce, all in the hopes of owning a home.
"I wanted a place I could call home, to have something to show for my hard work," the longtime Front Royal resident said.
Finally in 2006, her dream came true, and she purchased a home on Randolph Avenue.
But it didn't take long for the dream to turn into a nightmare. Expensive roof repairs and a decrepit furnace kept her on a treadmill, pouring more and more money into the home.
Refinancing seemed like a good option, and in the short term, it did help. Saville managed to install central heat and air conditioning in the home. But when the mortgage came due, she was shocked to find out just how much the payments had gone up. The new interest rate was 23 percent.
"I wasn't very smart about some things," she said. "I only thought my payments were going up a little bit."
Poor health forced her away from two of her jobs. The third followed soon after.
She lost her home in December.
It's a personal nightmare that's been repeated hundreds of times all over the Northern Shenandoah Valley.
Not that long ago, new homes were sprouting like weeds all over the region, and new residents were flocking in to get their piece of the American dream.
Growth and development issues were the hot-button items before virtually every local governing body.
It's only been a few years, but it might as well have been in a different lifetime.
That was before the housing bubble burst, taking hundreds of millions of dollars in economic activity with it -- and leaving a massive number of foreclosures in its wake.
Even now, two years into the resulting recession, the local economic damage has yet to be fully appreciated.
The speed at which boom became bust has people on all sides of the equation asking what happened.
How did thousands of new home starts per year turn into hundreds of foreclosures and evictions?
There's no simple answer, but builders, Realtors, credit counselors and economists all point to a common starting point -- cheap loans and easy credit standards that emerged in the years following 9/11.
Virtually anyone was able to qualify for a mortgage, demand for homes skyrocketed and the market rushed to provide the supply. Prices took off.
In April 2006, just after the peak of the boom, the average price of a home sold in Strasburg was $278,585. Winchester prices were up to $285,000, while Front Royal homes went for an average of $270,000.
Builders couldn't put up homes fast enough. A total of 561 permits for new housing units were granted in Shenandoah County in 2005, valued at $91 million, according to the U.S. Census Bureau. In Frederick County, closer to the Northern Virginia development wave, builders received 1,271 permits valued at more than $258 million.
Then, as quickly as it began, it all came crashing down.
For Dale White, of White Construction in Frederick County, it was almost as if someone flipped a switch.
"One day in October 2005, it just stopped," he said.
Buyers who were approved and ready to start construction began bailing out of contracts, leaving behind any deposits or other money they'd put on the table -- "kick-outs" in building industry parlance.
"We had no kick-outs for years, then in a three-month period, we had seven," White said. In hindsight, the kick-outs were the first sign that easy credit was coming to an end.
"We had loan approval letters from lending institutions that these people qualified, then all of the sudden these people didn't qualify anymore," he said.
Buyers who were bidding against each other for homes began to walk away. Homeowners who were looking to flip properties with a 20 percent profit had to cut the price in order to sell their homes.
"What really started it was people's outlook on what their home was really worth, versus what it was really worth," White said.
Said simply, people began to realize the emperor did not, in fact, have any clothes.
And then the rate resets began.
Foreclosures followed shortly thereafter, according to Kay Gentry, a counselor with Clearpoint Credit Counseling Solutions in Staunton.
Consumers nationally may have simply bitten off more than they could chew, but distressed home buyers in the Shenandoah Valley didn't plan on hard times.
"What we see is people that had an [adjustable-rate mortgage] loan, and their interest went up. At the time they purchased the home, they could pay for it," Gentry said. After the reset, many could still make their payments, but they were just one financial emergency away from disaster.
"With the job market like it is, one or both of the parents are working more than one job," Gentry said. "They need all of that. If you get someone who's even cut eight hours a week," the mortgage suddenly becomes unaffordable.
"If mom can't work for three months because she was in the hospital, that's three months with [less] income that they've got to deal with," she said.
Others ran into trouble with refinancing, cashing out growing equity to pay off credit cards, college tuition and other debts.
"They may have refinanced that house four times," Gentry said. "They've reached a point now that their house isn't worth what they owe on it."
That's where Saville found herself.
She called her mortgage company and asked for help -- a lower payment, some sort of forbearance to keep the home out of foreclosure.
"[A mortgage company representative] kept saying, 'Make one more payment, and we'll do that.' I'd make one more payment, and she said, 'Sorry, we can't do that.'"
Lowering the payment would have been better for everyone involved, but the mortgage company simply wouldn't budge, she said.
Falling values caught thousands of homeowners with shaky mortgages unaware. Low teaser rates on sub-prime ARMs began to run out, adjusting up to much higher rates. Without a steadily rising value to back a refinancing, many homeowners saw mortgage payments double or triple in just a few months.
Defaults -- loans that are 90 or more days delinquent -- skyrocketed.
In Frederick County, from April 2007 to April 2009, a full 40 percent of Federal Housing Administration-insured loans valued from $300,000 to $325,000 went into default in the first two years after the loan was issued, according to the Department of Housing and Urban Development.
Even more conventional loans saw catastrophic levels of default. Loans valued from $150,000 to $175,000 defaulted 12.5 percent of the time, more than four times the national average.
The majority of homeowners who defaulted managed to put themselves back on track. But enough went into foreclosure to build up a significant stock of unoccupied housing on the market.
With more and more homes to choose from and falling prices giving people an incentive to buy later, home builders got the message -- stop building houses.
By 2008, the housing industry in the Northern Shenandoah Valley was a mere shadow of its former self. In Shenandoah County, only 147 permits were issued in 2008, valued at $22 million -- a drop of nearly 76 percent. Frederick County took a similar hit, falling 78 percent to $57.3 million in 2008.
But Winchester was the overall loser -- new construction values there fell 87.4 percent from the peak of the boom.
One out of every 209 homes in Frederick County was in the foreclosure pipeline in April, according to RealtyTrac.com, an online foreclosure tracking service.
Builders suddenly found themselves competing for buyers with homes they'd just built a few years earlier. It's hard to overstate the damage done to residential builders.
"It's destroyed our lives, it's destroyed our families' lives," White said. "Pretty much everything that you've worked for has, at the best case, been put on hold."
Banks are keeping money on a much tighter leash, making it hard for construction companies to find the working capital they need.
"The banking industry won't give builders revolving credit any more," White said. "And they probably shouldn't. But that means clients have to do their own construction loans."
When clients have to arrange their own financing, they are much less likely to wade into the market.
"People who buy houses like the builder to build them and not pay anything until closing," White said. "And those days are over."
Negative trends became self-reinforcing, and by March of this year, 19.6 percent of all mortgage holders in Virginia were "under water" -- owing more on their homes than the homes were worth.
Another 25 percent were within 5 percent of being under water, according to information compiled by First American Core Logic, a mortgage information company.
The wave of foreclosures that followed flooded the market with homes, driving prices even lower.
Just how many homes flooded onto the market is hard to comprehend.
In the outer suburbs, including Winchester, Culpeper and Fredericksburg, inventories peaked in January 2008, with about 21 months of homes on the market at any given time.
A more normal number is about six months, according to MRIS.
Even more foreclosures might be on the horizon. While most of the sub-prime loans already have reset to higher rates, more resets are coming for so-called "pay-option" adjustable-rate mortgages.
Borrowers who took out pay-option ARMs had the option to make whatever payment they wanted on the loan. But if they didn't make enough of a payment to cover the interest for the month, the balance on the loan went up, not down.
Sub-prime resets made up $10 billion in resets in March, as opposed to just $1 billion or so for pay-option loans.
But the trickle of pay-option resets will quickly become a flood -- growing to $15 billion per month by January 2012, according to Credit Suisse's U.S. mortgage analysis division.
Lots of other types of mortgages will be resetting between now and the peak, projected sometime in 2012 -- a total of $1.3 trillion worth of mortgages.
That's as big as 9.5 percent of the entire U.S. economy.
Builders have seen the wave on the horizon.
"The numbers indicate that there will be another wave of foreclosures, but hopefully it won't be as big as the last one was," said White.
There are some rays of hope, though.
White says he's seen more interest from potential customers.
"I've seen an increase in the volume of calls," he said. A lot of people who lost their homes to foreclosure have moved into existing rental housing, taking inventory off the market.
Still, "you've got to work 10 times as hard now to earn a quarter of the money," he said.
* Next: Small businesses feel the heat.