For the longest time, the foreclosure crisis seemed as if it was happening everywhere but here in Lane County.

House sales here continued apace through last fall. Prices were holding. Unlike other parts of the country, few people were losing their homes to foreclosure.

But this winter brought record low numbers of house sales. Prices retreated to levels of four or five years ago. And Lane County foreclosure filings accelerated.

Now, Lane County is seeing the same kind of investor tours of foreclosed homes that marked the high water of misery in other parts of the country.

“We thought we were immune a year and a half ago,” said David Tatman, administrator of Oregon’s Division of Finance and Corporate Securities.

“We thought we were superior to the rest of the country because we weren’t seeing the reset shock on loans. Our housing prices had leveled off, but they looked like they were holding. Well, in the last nine months we’ve certainly played catch-up with a vengeance.”

Lane County is not immune because, in addition to homeowners who lost their jobs, there were residents here who also took out risky loans and told — or acquiesced to — little lies in order to close their real estate deals, the same as the rest of the country, mortgage brokers say. The lies got them into loans they couldn’t afford and now they’re heading into foreclosure.

About one out of five home loans that local brokers made in 2004 and 2005 were high interest rate loans, according to U.S. Housing and Urban Development Data. They were subprime or nonconforming loans made to people with lower credit scores, adjustable loans with low teaser payments that reset at a high rate after several years and loans that included 100 percent of the asking price plus closing costs.

The newly minted homeowners were happy but they had little skin in the game, at least at first.

Our very own market bubble

Lane County had its own housing appreciation bubble, beginning in early 2004. The average price jumped by $100,000, up from the $150,000 to $170,000 range of the 1990s and early 2000s. The real estate volume, as measured by dollars, went ballistic in those years. The normal Lane County volume was about $700 million a year. Suddenly, in 2005, it leapt to $1.2 billion, according to the Regional Multiple Listing Service.

Bidding wars were common. Buyers made offers sight unseen.

“It was almost to the point you’d ask a seller: What do you want for your house? And they’d almost get it,” real estate agent Deb Bean of ReMax Integrity said. “There was no rhyme or reason to it. It’s not like we were bringing in higher paying businesses with a ton of new jobs.”

At the height of the market, waiting to buy a house until you had a down payment didn’t make sense, Eugene mortgage broker Rick Richardson said. Homeowners couldn’t save fast enough to earn the kind of appreciation they’d see if they’d just buy.

Buyers could get into a house with no down payment because brokers offered new kinds of loans, such as 80/20, or piggyback, loans. Buyers took out a first mortgage to cover 80 percent of the cost of the house. Then, the same day, they took out a second mortgage at a higher interest rate to cover the remaining 20 percent.

Busy offices such as Allegiance Mortgage and Grandeur Financial brokered 100 percent mortgages almost exclusively in 2005, 2006 and into 2007, according to employees.

And when a monthly mortgage payment was out of reach for some buyers, local brokers turned to adjustable rate mortgages with low, interest-only payments for two, three or five years — before the loans required full interest and principal payments. After the introductory period, the interest rates would adjust once or twice a year every year for the life of the loan.

Many of these were “subprime” loans, meaning borrowers paid a higher interest rate because their credit histories were blemished.

Brokers reassured buyers that they could improve their credit while in the introductory period of these loans, before the payments reset to a high rate. Then the borrowers could refinance into a standard, 30-year fixed rate loan at lower interest rates, they were told.

“It was a Band-Aid,” said Susan Aldrich, owner of Grandeur Financial. “It was to get you into a house. You did A, B, C and D, and that cleaned up your credit, and you could refinance two years down the road (into a 30-year fixed loan) once you had seasoning — equity — in the property … That was the premise that everyone was schooled in when they came in here and filled in an application.”

Newfangled loans, Wall Street greed

While all this was going on, big investment banks and other lenders were coming out with loan programs to speed the mortgage-making process along. Borrowers with decent credit — at first, 740 or above on an 850-point scale — would no longer have to prove their earnings with W-2 forms or pay stubs. They could simply state their income.

As months went by, the credit score requirement for this “stated loan” or “no doc loan” or cynically “liar’s loan” slipped to 720, and then to 680 and then lower.

“At one point you could state your income and be at 580,” said Erick Harpole, a real estate agent with Keller Williams Realty, with offices in Eugene and Reno, who watched the loan frenzy from the sidelines.

If borrowers couldn’t qualify for one loan, there’d surely be another to place them in. A handful of standard loans splintered into hundreds of variations for every kind of credit, earnings and household situation, local brokers said.

“Can you fog a mirror? Great. What do you think your income is? To qualify, your income has to be ‘this.’ Do you make that amount of money? ‘Oh yeah absolutely.’ You laugh about it now, but it was stupid what people were able to qualify for,” Harpole said.

Many buyers were clueless, he said.

“(Brokers) said ‘Great. Here’s your loan. Sign these 170 pages that say you’ll make your payment or we’re going to take your house.’ Nobody reads that stuff because they’re so excited about buying a house. That’s the American Dream.”

The newfangled loans of the bubble years were made possible by investment banks — Bear Stearns and Lehman Brothers — which developed a hunger to buy and sell pools of mortgages because they saw them as a way to earn profits they couldn’t find anywhere else.

“There was a lot of greed on Wall Street’s part,” said Jack Hochman, a Lane County real estate investor. “The (stock) markets weren’t moving and the interest rates were at an all-time low back then. There wasn’t a place for these bankers to make fixed rates of return on their money.”

To these big investors, buying mortgages seemed like a lucrative bet, Harpole said. The default rate on home mortgages was 1 percent. In the rare case of default, the investor holding the mortgage could seize and sell the property. With prices rising, little would be lost. And offering subprime loans for people with sketchy credit was OK, from the investor’s standpoint, because these loans were paying 8 percent to 12 percent interest — more than just about any other investment at the time.

The investment bankers figured out how to package the loans into what are called mortgage-backed securities and market them to private equity firms, pension funds and hedge funds. As homeowners paid their mortgages, the proceeds would be distributed among the legions of investors who had bought parts of these packages.

Brokers, banks get in on the act

The home loan industry will never be the same.

“The requirement for your parents and my parents was you put 20 percent down and you can spend 25 percent of your income on housing. The bank was keeping that loan and, by God, they knew they didn’t want that property back, so they were going to make sure that you could afford it,” Tatman said. “The problem was the whole process got changed. The securitization really created a problem.”

In this frenzy of loan-making, Lane County mortgage brokers could make six-figure salaries, if they could close enough loans. They’d get a fee up front for originating the loan and then a share of the proceeds when they sold the loan to a wholesaler — adding up to as much as $4,000 to $12,000 per loan, local brokers said.

Becoming a broker didn’t take much sweat, said Hien Williams, a South Eugene High School graduate, who went to work at Allegiance Mortgage.

A prospective broker need only find a job at a brokerage, learn the trade from a senior loan officer in a six-month tryout and then take an online test, Williams said. “How easy is that? And then you get your license. I still really didn’t know what I was doing.”

As more and more private mortgage brokers hung out shingles, local banks and credit unions started to originate and sell mortgages for securitization. Oregon First Community Credit Union, Selco Community Credit Union and Umpqua Bank were among the institutions that got into the act.

“The market during that period of time gave more value to those loans than we could recognize if we retained them on our books,” said Ron Stroble, Umpqua’s mortgage division manager. “There was a year and three month period there that we actually sold. The market was so strong,”

The banks and credit unions say they didn’t go big into offering the exotic loans, but they also made one or more of these kinds of nontraditional loans: Pick-a-pay adjustable rate mortgages, piggy back 80/20 loans and/or no document loans.

A main difference from some independent brokers, however, is the credit unions sold mostly to customers with whom they’d keep a long-term relationship, said Scott Hirschhorn, senior loan officer with Selco Mortgage Co.

Credit union and community bank officials also said they didn’t reach down to the riskiest borrowers. They said they set a minimum credit score of 620 (on an 850-point scale) for their home loan customers. Umpqua said it only accepted lower scores a few times,

“We’re a pretty plain vanilla lender. We stick by the guidelines. There’s not a lot of excitement to that but it’s solid, good lending,” Stroble said.

Oregon Community Credit Union CEO Dal King said: “We didn’t play any of those crazy high risk games ever.”

Selling the loans was good business for the small banks and credit unions because they retained the servicing rights, meaning — for a continuing fee — they’d bill the borrowers, settle disputes and even start foreclosure proceedings on behalf of the mortgage-backed security holders.

In competition for mortgages

With bankers, investors and free-lance brokers in the act, mortgage making was a crowded field between 2004 and 2008.

“Everybody and their dog became a mortgage broker,” Alrich said. “Pizza salesmen were mortgage brokers for God sakes. Everybody knew a family member, co-worker or friend who was a mortgage broker.”

The mortgage brokers were fierce competitors. They formed relationships with real estate agents so the agents would steer homebuyers their way. They advertised on television and billboards. They worked their networks and their telephones, brokers said.

The impetus to sell came from the investment bankers who created the new types of loans and then set the loose guidelines that borrowers needed, the brokers said.

Loan wholesalers, who bought the loans, packaged them and resold them to investors, spread the word about each new program. They’d make regular stops at Lane County mortgage offices, take loan officers out for burgers and brews at Red Robin or the Steelhead, and then they’d conduct mini-seminars on the latest loan products.

Afterward, the wholesaler would meet privately in brokers’ offices, where they’d go over loan files, looking for mortgages to buy. Some wholesalers would actually fill out documents on behalf of the loan officers, the brokers said. Others showed the brokers how to win underwriter approval for stalled loan applications by bending the truth with regard to income and employment. A half dozen brokers interviewed for this story described the methods.

“Lenders sent their reps down to your office and they’d tell you how to do it,” Williams said. “They’re the ones who tell you, ‘OK, the person doesn’t make enough? Do a stated loan, as long as it isn’t overly exaggerated. You can’t say a janitor makes 60 grand. It has to be within reason.’ ”

The wholesalers would “tell you what the file had to have and how the loan worked,” Aldrich said. Sometimes that meant pencilling in the entire household income in the box asking for a single wage earner’s income, she said.

In other cases, when, for instance, a foreman at a sawmill might not qualify for a house he wanted because his income was a bit low, the loan officer might look up the salary range for sawmill foremen and write down the higher of the salaries as belonging to his customer, Richardson said.

“I thought that was crossing the line. I wouldn’t do that. But it was very much done,” he said.

Investigations into mortgage fraud

Traditionally, lenders required that monthly payments on a house could be no more than 25 percent to 33 percent of the borrower’s gross income. But in the boom mortgage years some brokers made loans with payments that took as much as 70 percent of the borrower’s monthly income. “What did the debt-to-income matter if they were making the numbers up anyway?” Richardson said.

Some brokers, however, said they were steadfast in their resistance to fudging the numbers. “I never went to the buyer and said, ‘Look, this is what you need to make to qualify. That’s wrong. I’ve been very careful in my 20 years in business not to do things like that,” said broker Fred Chamberlin of Alpine Mortgage.

Mortgage fraud increased markedly during the boom years, said FBI supervisor Joe Boyer, who oversees white collar crime in Oregon. “We’re investigating a lot of cases involving similar allegations of false loan applications, and they’re false for a number of reasons — overstated income, understated liabilities,” he said. “The extent of it that went on is a lot more than one would have expected.”

Practices at Countrywide Financial Corp., a top subprime lender, attracted the scrutiny of attorneys general in 33 states — including Oregon — who charged the company with enticing homeowners into loans they couldn’t afford, failing to fully explain the risks the homeowners faced and boosting the company’s share of the mortgage resale market by closing shaky home loans. As many as 4,600 Oregonians took out those subprime loans, according to Attorney General John Kroger.

Countrywide settled lawsuits with the attorneys general without admitting fault and has agreed to pay $8.68 billion to renegotiate as many as 400,000 home loans nationwide.

Many of the home loans made in Lane County from 2004 to mid-2007 are now coming back to haunt us. Of the first 100 home loan defaults filed in Lane County in 2009, 84 were made during that time period.

The inflated loans were made to match the then-inflating home prices. Now, as home prices drop, these homeowners owe more than the house is worth.

The desperate ones are selling houses for less than they owe. “And they set the price for everybody else,” Harpole said.

Some owners simply give up. “They financed 100 percent of their house and their house went down in value,” said John Helmick, CEO of Gorilla Capital, which specializes in buying foreclosed houses. “Now, it’s a rational economic choice for them to walk away from the house rather than continue to pay for the house when it’s not worth as much as they owe on it.”

Homeowners who’ve been paying low teaser rates are expected to default as the loans reset to higher levels in the coming years, leading to an even higher foreclosure rate. The bulk of them will reset in 2010 and 2011, Harpole said.

“There’s a lot of people who can’t afford their property. And you (recently) had 2,000 people get laid off from Monaco,” he said. “There’s no doubt we’re going to see more and more of those defaulting.”