SACRAMENTO, Calif. – The streets of Gretchen Lancero’s neighborhood in Sacramento’s North Natomas area have names like Dreamy, Charm and Celebration, reminders of the heady days of the housing boom when people lined up to buy new houses here.

Today, North Natomas epitomizes the nation’s housing bust. And on Celebration Street, Lancero and her family are among a handful of the original buyers still clinging to their homes.

Many people on Celebration Street and elsewhere in North Natomas lost their homes because they could not pay. Others who could pay chose not to stay chained to houses worth much less than they owed, and either got their lender to agree to a short sale, or simply walked away and allowed the home to go into foreclosure.

Bankers have coined a term for this: “strategic default.” The practice has become common, with some financial experts urging people to do it if they have little chance of recouping their investment.

“All of our friends are doing it,” Lancero said. “Good, moral people are doing it. I’ve talked to people in the mortgage business. They say, ‘It’s morally fine. Just do it.’ But if we can, we really want to do the right thing.”

What happened on Celebration Street has played out on streets all over North Natomas and other newly minted communities in the Sacramento region. Entire neighborhoods turned over in the space of a few years as home values fell by half. In each of these places, however, there are people who have stuck it out in the face of overwhelming financial reasons to leave.

“The people who have found a way to stay have great resolve,” said Sacramento City Councilwoman Angelique Ashby, who represents North Natomas and lives there in an underwater house, meaning she owes more on her mortgage than her house is worth.

In this sprawling community of 55,000 that rose from a floodplain in less than a decade, about two out of every five homes has received a foreclosure notice since 2006. Nearly the same proportion of homes has changed hands since December 2007, a McClatchy Newspapers review of foreclosure data and property records show.

Lenders sent out nearly 7,500 foreclosure notices in the past six years, though some homeowners received more than one notice.

On Celebration Street, only three of the 15 homeowners who bought new houses in 2005 remain. Two homes are being rented out by the original owners. Four homes were lost to foreclosure. Others were unloaded in short sales, where the bank agrees to accept less than what is owed.

Families who have stuck it out say a sense of moral obligation to pay their debts and a desire to give their children stability are among the reasons they stay in homes so deeply underwater.

“We gave our word. We signed the documents. We try to have integrity in everything we do,” said Lancero, a mother of three who cited her Christian values as one reason her family has stayed put.

She and her husband, Jeff, a state worker, sold their SUV and took in a boarder to help pay their mortgage. They stopped driving their children to school in Davis, Calif., and began homeschooling them instead.

The couple are refinancing under HARP, a federal program that allows many underwater homeowners who are current on their mortgage payments to get a lower interest rate.

The Lanceros paid $447,500 for their 2,000-square-foot home in October 2005 and put $100,000 down from the sale of another Natomas home. It’s now worth about $218,000, the tracking firm Zillow estimates.

That’s typical for the neighborhood.

Home building giant Lennar built the three- to five-bedroom homes on Celebration Street on ample lots between 2004 and 2006. Prices ranged from $350,000 to more than $450,000.

All the homes sit along the west side of the street. Buyers were originally told a school would go on the east side, but it never materialized. Developers won approval from the city to build three dozen homes on the empty school site, but those plans remain wishful thinking.

For now, neighborhood children play in the vacant lot, which they call “pokey mountain” because of the weedy prickers that grow on the mound of earth there, residents said.

The high turnover has led to some crime problems. Neighbors said that in March 2007 police busted a house where marijuana was being grown. They arrived home to find officers dragging out pot plants.

“It’s been so many people in and out,” Lancero said.

Nevertheless, she said, “As long as we can afford it, we’re going to do this. This is where we want to be. This is our forever home.”

Lancero said her family likes the large size of their lot and has grown close to the two other families who have stayed. Even the vacant lot across the street is a good place for the kids to play.

Two other original families, the Hongs and the Chernows, remain on Celebration Street. The three families’ homes are grouped together in the middle of the block.

“We’re happy with the schools,” said Derek Chernow. “We’re happy with the nucleus of folks who have stayed. We’re vested now. We want to see this community do well.”

Former Celebration Street homeowners who were foreclosed upon either hung up or did not return phone calls. Some who left via short sales said they were glad to escape to better circumstances.

“It wasn’t what you hoped it would be,” said Rhonda Elliott of her family’s five years on Celebration Street. She and her husband, Spencer, executed a short sale on their Natomas house and moved to a more stable neighborhood in Davis.

They were lucky. Many who exit via short sales have to wait at least two years to repair their credit rating. Elliott and her husband were able to buy again quickly because the Natomas house was in his name alone, so she emerged with intact credit.

When they bought on Celebration Street in 2005, the couple were renting and saw home prices climbing higher each week.

“We thought, ‘Oh, my gosh, if we don’t get into a house now we’re never going to,”‘ she said.

They paid $394,000 for the house in 2005. It sold last year for $177,000, according to Zillow.

The atmosphere remained “generally positive” on Celebration Street through the plummet in home prices, Elliott said. A Neighborhood Watch formed, and neighbors had regular block parties. But the constant turnover undermined their vision of a stable neighborhood of long-term residents.

“Had the market not done what it did, we probably would have stayed,” Elliott said.

Jaime Boseman, a sergeant in the Army, said he and his wife sold their house on Celebration Street a few years ago for less than what they owed. A military program made up the difference.

Now they live in Houston. The mortgage on their 3,600-square-foot home, built in 2005, costs about $1,700 a month with taxes and insurance, Boseman said.

They were paying $2,500 a month for a 1,350-square-foot home on Celebration Street that they bought in 2005 for $372,000. It sold in 2010 for $196,000, and is now worth about $158,000, Zillow estimates.

Back when they bought the Natomas house, “it was like a lottery,” Boseman recalled. He drove from the San Francisco Bay Area every weekend for a chance at snagging a piece of the North Natomas dream.

“They were going to release so many homes and call 10 families, and we were No. 11. The next weekend it was like $10,000 more,” he said.

“When we finally got in, we thought it was OK because in a couple of years it would be worth twice that. That didn’t happen.”

Boseman said he was grateful for the military program that let him leave with his credit intact. But he said he would have considered walking away from the house and dealing with the consequences of foreclosure rather than having to absorb such huge losses.

“My advice is: Why stick with it?” he said.

The decision to stay or walk away often comes down to a person’s sense of obligation, said Tess Wilkinson-Ryan, a psychologist and law professor at the University of Pennsylvania who studies how people think about contractual obligations, including mortgages.

Traditionally, she said, foreclosure was a stigmatizing event and something to avoid at all costs. Not only would it wreck a borrower’s credit rating for years, but many borrowers felt a personal sense of obligation to lenders that were often local institutions.

Those feelings are still deeply ingrained among some homeowners, she said.

“Many people are unwilling to breach a contract even when it would be profitable for them. There’s this promise you’ve made to pay your mortgage, and (by breaking it) you’re imposing a loss on someone else — the bank.”

But the severity of the fall in home prices, and the breadth of the housing crisis, has created a new normal in which defaults or short sales are more acceptable, she said.

“It’s hard for something to be so stigmatizing when it’s happening to so many people.”

Mortgage banks, meanwhile, are distant entities that people perceive as engaging in deceptive lending practices and other bad behavior.

The rationale, Wilkinson-Ryan said, is, “If you’re going to take these kinds of risks, why shouldn’t I?”

In some ways, people have come to see a foreclosure or a short sale — both of which hurt the borrower’s credit — as optional penalties built into the mortgage contract, like the early termination fee for switching cellphone providers. Behavioral economists call it a “weak sanction,” Wilkinson-Ryan said.

“When people see a weak sanction (they start) thinking about costs and benefits instead of moral norms,” she said.

For Gretchen Lancero, however, the choice to stay on Celebration Street remains a moral one.

“If a grave catastrophe happened, we’d think about leaving,” she said.

“But we’ve been able to stay afloat. We’re very grateful.”

 


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