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First in a four-part series : THE FORECLOSURE FRONT

Desert oasis was a mirage after all

A couple traded up in La Quinta. But their calculated risk has put them out of a home.

June 02, 2008|Peter Y. Hong | Times Staff Writer

LA QUINTA — Like a lot of houses here, the Spanish-style five-bedroom Gary and Debra Magsam bought three years ago has a sparkling pool, a designer kitchen and a nearby golf course.

Now it has one other feature common to the area: a foreclosure notice. Barring a last-minute reprieve, the Magsams' house will be auctioned June 27. They've begun to pack.

"We've accepted the fact that it's going to have to take place," Gary, 48, said of their impending departure. "For a long time we felt, 'Why did this have to happen to us?' " he said. "Now we know a lot of other people are going through the same thing. It seems to make it a little easier to accept."

The Magsams are among an estimated 243,000 American households, including more than 47,000 in California, that face the prospect of foreclosure this year. Congress is expected to pass legislation by the fall that would help an estimated 500,000 households avoid foreclosure. But for the Magsams and thousands of others, the relief would probably be too little to help them, even if it weren't already too late.

The Magsams aren't looking for a handout, however, and they don't blame predatory mortgage brokers or Wall Street financial wizards for their plight. Instead, they say they simply got caught up in the excitement of the real estate boom and the bad judgment that went with it -- on the part of lenders and borrowers alike.

"The banks loaned money to all kinds of people they shouldn't have, including us," Gary said. "This situation we're in is one of our own making. We were not taken advantage of."

As analysts explain the rising tide of foreclosures sweeping the country, many point to first-time home buyers who used sub-prime loans to finance properties they couldn't quite afford. But many of those facing foreclosure are people like the Magsams -- experienced homeowners who simply didn't expect that values would fall so hard, so fast.

Rising home prices created "a false sense of security," said UCLA economist Edward E. Leamer. "Borrowers are realizing some of the decisions they made over the last few years were not that wise."

Gary acknowledges that before the boom went bust, he and his wife were among its many beneficiaries.

In 1999, the Magsams and their two sons came from Wisconsin to visit relatives in the Palm Springs area. They liked it so much they decided to stay, happy to be done with the Wisconsin winters. That year, the couple bought a house in the Coachella Valley town of Bermuda Dunes.

They paid $140,000 for that house and sold it the next year for $170,000. Southern California real estate looked like a solid investment. In Wisconsin, that kind of price appreciation would have taken five years or more.

The Magsams scored again with their next home, which they bought in La Quinta for $215,000 in 2000. Four years later they sold it for $452,000, more than twice what they paid.

Proceeds from that sale enabled them to buy their current house in late 2004 for $685,000. They took out a mortgage for $537,000. A year later, with the house worth an estimated $865,000, they took out a second mortgage for $100,000.

With new construction booming and real estate values soaring, people spent freely on home improvements, and the Magsams' business selling blinds, awnings and outdoor misting systems took off. La Quinta was one of the Inland Empire's boom towns, its population swelling about 75% from the beginning of the decade to a current 43,600.

The couple's business had five full-time employees, and its gross sales grew to more than $40,000 a month, Debra said. They had obtained an adjustable-rate loan to buy the house, but they thought they would have plenty of income to cover the bigger payments once the interest rate reset upward. And if not, they figured they could always sell the house for a neat profit.

Then in 2006, the real estate market began to cool off. Construction slowed in the new developments around them, and then halted. So did orders for their blinds and awnings.

By 2007, they had let their employees go and moved out of their office, running their business from their house. Over the last year, revenue has shrunk to about $5,000 a month, Debra said.

Barely breaking even, the Magsams said they tried to re-negotiate their loan. But their lender told them they couldn't do much because Gary was self-employed.

They stopped paying the mortgage in December, just before their interest rate was reset, raising their monthly payment to $4,000, up from $2,400.

To try to reduce the damage to their credit, they put the house on the market for $549,000. There were no takers. They cut the price five times, most recently to $490,000, each time with the same result.

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