SANTA MARIA, CALIF. — Two years ago, Patricia Prado worried that she would never be able to buy a house.
Property values in this Central Coast farm town had been rising sharply, and Prado and her husband were burdened by $18,000 in debt from their credit cards and the loan on their Jeep Grand Cherokee.
Prado remembers expressing worry about her situation to co-workers at the food processing plant where she works. A few days later, she got a phone call from a mortgage broker who said she had heard her tale and had a solution: a mortgage loan that required no money down.
"She made everything sound like it was going to be wonderful," said Prado, 38.
A few weeks later, Prado bought a $412,000 house with a so-called 80/20 mortgage. Those mortgages are actually a pair of loans -- one for 80% of the purchase price and another for the remaining 20%.
As home values soared a few years ago, these 80/20 loans were the only way many people could afford to buy a home. Some studies suggest they may even have constituted the majority of new mortgages in California in recent years.
The loans can make sense when property values are rising, enabling people to buy a home without having to spend years saving for a big down payment.
"In some places, where house prices were running up 20% year over year, you only needed one year of that run-up for the package to become well-collateralized," said Stuart Gabriel, a UCLA real estate finance expert.
"All of that was predicated entirely on the presumption, the expectation, of a continued significant house price run-up," Gabriel said.
Property values, of course, began falling sharply last year. And that left people such as Prado, who bought near the top of the market, owing more in loans than their homes were worth. Her home is set to be sold in a foreclosure auction next week.
Prado tells her story without a trace of self-pity and only a bit of blame for the mortgage broker who she says gave her a hard sell.
She acknowledged that she stated her monthly income as $7,500 on the loan application -- nearly double what she was actually earning in her job as a clerk at a food processing company and a second part-time job.
Still, she was confident the payments would not be a problem. At the time, her husband (who declined to be interviewed for this story) was earning $20 an hour as a carpenter as builders turned the area's broccoli fields into housing developments.
