Ground Zero of the Real Estate Bust

Overbuilt and overleveraged, metro Denver typifies the mortgage massacre that has buckled U.S. home prices and roiled the stock market

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Ray Ng for TIME

The boom in risky and subprime mortgages is finally catching up to neighborhoods like this one in Denver, where delinquencies, defaults and foreclosures are spiking.

First come the billboards. As you head north, away from downtown Denver, they flip by like flash cards, advertising houses by Lennar, KB Home and Richmond American, from the $100s, the $170s, the low $300s. What they don't tell you is that should you wander into one of the new subdivisions popping up from the prairie, you're likely to be offered tens of thousands of dollars in incentives to buy, and to buy now. At a recent conference of Colorado builders and real estate agents, one speaker counseled salespeople to stop acting so desperate. "It sends the signal that the market is bad," he said, "and to wait for the bottom."

Yet as Denver richly illustrates, there is plenty of bottom left to wait for. It's a far cry from the days of double-digit home-price gains and mass speculation in hot markets like Las Vegas--where 40% of the houses up for sale now sit vacant. What's astonishing about this particular real estate bust, though, is the way the damage has pinballed across the financial universe: mortgage companies in Los Angeles, banks in Seattle, hedge funds in Australia, the European Central Bank, Wall Street investment houses and Main Street stockholders have all had the American real estate market fall on them.

Call it the international house of pancaked leverage, built on the proliferation of subprime and exotic mortgages that did away with many of the safeguards built into the classic 30-year fixed rate with a 20% down payment. Riskier loans originally designed for a narrow band of home buyers--interest only, adjustable rate, balloon payment, no documentation (of income, that is)--took off broadly in the last rising market, and Denver was one of the many areas where they were hot.

The demand was coming not so much from borrowers as from Wall Street, which packaged the loans into securities to sell to investors looking to pile into "low risk" real estate. So mortgage brokers found ways to squeeze buyers into first and second mortgages even when their finances were questionable. Consider the appellation NINJA, used to indicate a buyer with no income, no job and no assets. "Capital was made available to every Tom, Dick and Harry," says Zachary Urban, who runs the Colorado Foreclosure Hotline.

Urban is now dealing with the fallout: 18,000 calls in the past 10 months. Calls from people like Essie Kemp, who lives in the hard-hit neighborhood of Montbello. Kemp is faced with losing the home she has lived in for 23 years, since she can no longer make the payments on her refinanced mortgage. She wanted to have money to buy an air conditioner and fix her pipes. What she got was an adjustable-rate mortgage that spiked after two years. It wasn't until she went to see a housing counselor that she realized her income was listed as $4,000 a month--more than twice what she was making from a part-time job and Social Security. "I've done all I can do to keep my end of the bargain," says Kemp, "but it just didn't work."

And it's not working for about 25,000 people who will receive a first notice of foreclosure this year in the seven-county Denver metro area, according to the housing-analytics firm the Genesis Group. That's about half the number of people who could be expected to put their homes up for sale in a normal market. The most distressed neighborhoods are seeing foreclosure rates rivaling those produced during the state's oil and gas bust of the 1980s--except these days, there aren't mass layoffs to blame. Just flat house prices and tighter credit standards, which make it harder for homeowners to sell or refinance their way out of trouble.

Green Valley Ranch, to the east of downtown Denver, is one neighborhood having a particularly tough time. Houses are still going up in the massive multiphase development, but within the new construction lurk bus benches advertising foreclosure assistance. Many of the people who have run into difficulty are first-time buyers who jumped into mortgages they couldn't afford in the long term. Now, as they endure the heart-wrenching saga of slowly losing their homes, the whole neighborhood suffers: according to a study by Dan Immergluck at the Georgia Institute of Technology, a house loses 1% of its value for each foreclosure within an eighth of a mile (200 m).

Foreclosed Is Forewarned

DENVER IS JUST ONE PIN ON THE NATIONAL map. Looking across the country, the foreclosure problem is worst in areas where house prices went wildest (southern Florida, California), where local economies are depressed (Cleveland, Detroit) and where regulators paid little attention during the go-go years (before a new law took effect in January, mortgage brokers in Colorado didn't have to be registered). But it is important to point out that while Colorado has one of the nation's highest foreclosure rates, according to property tracker RealtyTrac, many parts are doing just fine. Prices in Denver's newly hip Highlands neighborhood, a community full of bungalow homes and yuppies, were up 13% last year, according to listings data crunched by real estate agent Ed Tomlinson. And ski resorts like Copper Mountain can't build enough pricey condos.

But troubles that exist in distinct pockets can ripple outward. In the northern suburb of Thornton, Stephanie Brown is trying to sell her four-bedroom house for $445,000, just enough to break even on her investment, since she's eager to move closer to her new job. Yet in a month on the market, she's had only a single showing. On one side, she is up against home builders who are knocking $100,000 off the price of houses similar to hers. On the other, she faces a market flooded with foreclosed properties, like the hundreds up for sale at two different auctions in Denver on a recent weekend, some of which started with bids of half the estimated market value. "It's hard to sell a house if you can't even get people in the door to look at it," says Brown.

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