The number of foreclosures in Virginia soared from 4,354 in 2006 to an estimated 14,000 this year. In 2008, the number could reach 20,000. Today, we look at how the mortgage crisis is affecting you and your neighbors. Scott and Dawn Loving were able to stop the foreclosure on their house -- at least temporarily.

The Lovings got into trouble when the subprime adjustable-rate mortgage on their Chesterfield County home reset after two years. They are among an estimated 14,000 Virginia households facing foreclosure this year.

Their monthly payment jumped from $1,250 to $1,400, resetting six months later at $1,600, then again at $1,650. Their new payment consumed more than half their net income. A house is considered affordable if the monthly payment is no more than 30 percent of income.

Scott is the sole wage earner. Dawn is home with their children, ages 1, 4 and 6. The high cost of day care does not justify her returning to work, he said.

"We were OK the first two years, but we got stretched when the payment went up $400," Scott said. The Lovings agreed to a subprime loan because past credit problems limited their options.

He and his wife hope their lender will modify the terms of their loan so they can stay in their house and be able to make payments. They don't know if they will succeed.

Scott, 38, is a business systems analyst for a marketing company in Richmond's Shockoe Bottom, making close to Virginia's median household income of $51,914.

"If it can happen to the Lovings, it can happen to anyone," said Paula Sherman, lending-protection coordinator at Housing Opportunities Made Equal, a nonprofit housing advocacy agency in Richmond. "This isn't a lowto moderate-income problem."

. . .

In the next 18 months, about 2 million families in the U.S. will lose their houses, mostly because of subprime loans resetting at rates people cannot afford, according to the Consumer Federation of America.

Subprime loans were made to people with poor or risky credit histories.

The mortgage crisis is bleeding into the rest of the economy as the housing slump erodes consumer confidence and loans become more difficult to obtain even for people with good credit.

Lenders are tallying their losses, with major banks writing down $44 billion in losses from bad loans in the third quarter. Early figures for the fourth quarter are approaching $30 billion.

Virginia had the third-lowest foreclosure rate of the 50 states at the end of the second quarter, according to the National Association of Realtors.

Yet the number here is rising sharply -- up 10,000 this year from 4,354 last year, and it could hit 20,000 next year, Sherman said. In perspective, 2 million people own homes in Virginia, so 1 percent of households could face foreclosure.

"We have been waiting for the floodgates to open; they are opening," Sherman said.

Gov. Timothy M. Kaine is forming a task force to address rising foreclosures in the state and help people before they lose their houses.

Traditionally, foreclosures involved hardships, such as a loss of income or divorce, Sherman said. Most new foreclosures are the result of subprime adjustable-rate mortgage loans resetting at rates that homeowners cannot afford.

The only way out is to refinance, but options -- as the Lovings discovered -- are few.

Even for those who can get new loans, many have little or no equity in their houses since prices have stabilized, as in Richmond, or fallen, as they have elsewhere.

The problem is likely to worsen as a second wave of subprime ARMs resets in the next couple of years. The loans were made when credit was easy and exotic products, such as ARMs with below-market introductory rates and interest-only loans, were plentiful.

"Yes, everywhere around the nation, the subprime-mortgage issue is affecting some people," said Christine Chmura of Chmura Economics & Analytics in Richmond. "But from what we can tell so far, the impact in the Richmond area is relatively small."

Interest rates have headed down twice this year, and that could help ease the pain of resetting, she said.

"What is unprecedented is the subprime-mortgage crisis is happening across the country," said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. "Twenty to 30 percent of loans originated in the last two years are ending up in foreclosure."

The numbers do not include distress sales, where homeowners offer their houses at discounts, hoping to sell quickly to avoid foreclosures. Nor do they account for short sales, where homeowners sell their houses for less than the amount they owe.

"The problem is so large, it's a societal problem," Fishbein said.

Lenders are overwhelmed by the scope of the problem, he said. Traditionally, they have focused on collecting back payments and fees, not restructuring debt and helping people stay in their homes.

"Harmed the most are the homeowners," Fishbein said. "The loan servicer doesn't own the loan and can't tell the homeowner what needs to be done."

Mortgage servicers are not staffed to deal with the problem loan by loan.

"Meanwhile, the clock is ticking, loans are resetting, and homeowners are unable to handle the payments," Fishbein said.

. . .

The Lovings tried repeatedly to get in touch with their lender. "Send more money, send more money," they said they were told.

They got the subprime loan because their credit was damaged years ago when they went on a debt-management plan to pay off $30,000 in credit-card debt.

They were locked into their original mortgage because it carried a hefty prepayment penalty.

As soon as the penalty phase passed, they looked into refinancing. "At least a dozen lenders turned us down," Scott said.

They found one taker. The payoff on the old loan -- a combo ARM and fixed-rate mortgage -- was $137,000.

They walked away with another ARM. This one was for $161,000, which increased their debt. It included $4,000 in cash. Fees and closing costs totaled $20,000.

"We didn't feel we had any choice," Scott said.

The new payment is $1,623, not much better than the $1,650 payment on the old loan. "But we had a fresh start," he said.

The initial interest rate on the new loan is 9.8 percent, 0.1 percent better than the old loan. It, too, has a prepayment penalty -- 5 percent of the loan amount. It resets next June.

The Lovings kept up with their new payments for a few months. Then one payment was put into escrow and the Lovings were one month behind.

Repeated calls to the lender solved nothing. When the couple received notice of a foreclosure sale, they turned to Housing Opportunities Made Equal.

"You can breathe," they said their HOME counselor told them. She had been able to do what they couldn't -- open a line of communication with the lender.

"We're in limbo," Scott said, as they wait to find out if their lender will work with them. "We should find out right before Christmas if we can keep our house."

A 60-day extension was secured on the foreclosure so the Lovings could ask the lender to modify the terms of the loan.

"Banks are really stepping up, but for many, it's a day late and a dollar short," said Ann Estes, vice president for ClearPoint Financial Solutions, a nonprofit consumer credit-counseling agency based in Richmond.

The Lovings hang on to the hope that it isn't too late -- that they can keep their house and make payments they can afford.

For others looking at a loan reset, get into a fixed-rate loan and do it today, Estes said. "Don't put it off."
Contact Carol Hazard at (804) 775-8023 or chazard@timesdispatch.com.