'We should never have refinanced'

Grace Shultz didn't want to lose her house.  It was more than a century old, with a gracious central hall, a large living room and dining room and three bedrooms.  It was on a quiet street in Raphine, and the neighbors were friendly.  It was just about perfect.

The only problem was that Schultz had refinanced her home in 2005, which caused her interest rate to shoot up and her monthly payments to almost double.  She had refinanced not just the house, but her college debt, a backlog of credit card bills, and a $50,000 equity line.  She was also supporting her mother, whose health was deteriorating from Alzheimer's disease, and her teenage daughter.  Schultz hoped to clump her expenses into a single manageable loan.

"I said, 'Let's just refinance,' and that was my mistake," she said. "We should never have refinanced."

Two years later, Schultz had to move her mother to a nursing home for full-time care.  The loss of her mother's retirement income, which had been helping to pay the bills, and the added medical expenses cut Schultz's income in half.  She was able to scrape by for a few more months before her savings ran out.

Shultz stopped making mortgage payments in October 2007 and after months of haggling with her bank to work out a payment plan, the bank foreclosed on her house in April.

"I did everything the bank told me to do," Schultz said. "I kept contact with the bank...I filed for two, three hardship [loans], Fanny Mae, everything.  I did what they asked me to do.  And then they turned it over to lawyers and that was it."

Shultz's loss is part of a growing trend, nationally and locally.  Buena Vista Realtor Dennis Hawes, who typically sells eight to 12 foreclosed houses a year, expects to sell as many as 30 this year. Foreclosure filings, including default notices, auction sale notices and bank repossessions, increased by 56 percent this year, according to RealtyTrac, an online marketplace for foreclosure properties.

With more homeowners in trouble, banks have tightened their lending standards.  Fewer loans are being made, and there is less investment in the housing market, causing supply to go up and prices to go down.  In Rockbridge County, average home values have fallen by 18 percent this year, according to Rockbridge area Realtor Paula Martin.

For many homeowners, the tight money and drop in home values mean they have been unable to sell their houses and pay off their mortgages.  Instead, they have been stuck with mortgage payments and home equity lines while other expenses like cars, credit cards, food, utilities and medical expenses have piled up.  For some, foreclosure is the only option.

What precipitated the flood of foreclosure?  Why did homeowners take on mortgages they couldn't afford?  How are foreclosures affecting the economy?