Subprime & Punishment José and Marcos Rios poured the foundation for their dream house in the Virginia exurbs. If only their loans had been as solid.

During the real estate boom that started in 2001 and stretched on for half a decade, construction workers Marcos and José Rios helped build thousands of elegant new homes sweeping across the Washington region.

The houses had names like the Oberlin, the Savoy, and the Victoria, says Marcos. Besides posh labels, they had features like "great rooms," fireplaces, multicar garages, and manicured lawns.

The brothers worked long hours-often clocking in 12- to 14-hour days-pouring the foundations and sidewalks in the new developments. When the workweek was over, they turned to soccer.

The Rioses, who grew up in El Salvador but now call Manassas home, would get together with friends to play on just about any serviceable patch of greenery, wives and kids cheering from the sidelines. As the region's Hispanic population has grown, it has become an increasingly commonplace scene. In fact, the search for a free field has become the biggest challenge of the game.

One day in the summer of 2005, they were playing on a field near Route 17, a good half-hour's drive from Manassas. On the way to the game, they saw a sign for the office of NVR, Inc., one of the nation's largest home builders, and decided to stop in. The sales team gave them brochures and squired them around to several developments under construction.

For some time, the brothers had considered buying land to build a new house for their growing families-Marcos and Berta Rios have two daughters, and José and Nora Rios have one. They wanted a home that would symbolize how far they'd come since fleeing civil war and poverty in El Salvador nearly two decades ago. After visiting a half-dozen new developments under construction, they settled on a lot in Remington, Va., about 30 miles southwest of Manassas.

They were thrilled to learn they wouldn't have any trouble qualifying for a loan. If the brothers bought a house using NVR Mortgage Finance, Inc., the salesperson said monthly payments could be as low as $1,800.

In late 2005, they signed a contract on a $519,000 red-brick dreamboat dubbed "the Oberlin," one of the models they'd helped build for others. It had five bedrooms, three baths, and a Jacuzzi.

The family was ecstatic when they moved in the following summer. They bought a new living room set and went about decorating the place with family photos and mementos. José's daughter Jacqueline, now 8, was excited to have a room of her own downstairs, off the foyer. They decorated the second floor bedroom shared by Marcos' daughters Kelly, now 6, and Tatiana, now 18 months, with purple and silver Bratz beads strung across the doorway.

"Once it was finished, the house looked beautiful," Marcos says. "We were going to be more comfortable there."

The only person who voiced concerns about the purchase was Frank Rourk, a longtime real estate agent who had sold the Rioses their first home in Manassas. Rourk told the brothers that a half-million-dollar home didn't make sense on their combined $8,000-a-month salaries.

"If we had only listened to Frank," Marcos says.

Life Story

The Rios brothers have a habit of doing things together, or at least in close succession. Marcos, who at 37 is the eldest of five siblings, came to the United States from his native El Salvador in 1990 to escape the country's protracted civil war. José, 28, followed a few years later. Marcos started working at Manassas-based Long Island Concrete in 1992; José started in 1995.

They married two sisters from a town in El Salvador that's not far from their own. The two families pooled their resources and in 2002 bought a three-bedroom house on a quiet residential street with plenty of room for the kids to play in the fenced-in backyard.

José is the one who pays the family's bills. And after getting lectured by a homeowner's insurance broker about the importance of keeping records, he has four boxes filled with proof of mortgage, phone, electric bills, and other payments made in the last three years.

Those records document the wonders of homeownership. About three years after they bought their split-level, ranch-style Manassas house, its appraised value had more than doubled to nearly $400,000, and the monthly mortgage payment was a manageable $1,477.

The Rioses used their starter home to leverage their dream home. For the $519,000 sales price on the 3,776-square-foot house in Remington, the brothers said they needed a $53,000 down payment.

Aspiring homeowners strapped for down payment money commonly sell their first home or take out a modest line of credit.

The Rioses, however, chose a different approach. They turned to Diana Paternina of the Tysons Corner office of East West Mortgage Co., a company that aggressively courts Hispanic home buyers with ads on Hispanic radio stations. Paternina, who speaks Spanish, had set them up with the mortgage on their first home.

This time, she sold them on a plan to refinance their existing home loan, promising, they recall, cash and lower monthly payments that would allow them to hang onto the Manassas abode as a rental property after they moved into their new digs in Remington. What they got was an adjustable-rate mortgage that started at the bargain-basement rate of 1 percent.

After redoing their loans on the Manassas place, the brothers turned their attention to getting a financing package for the Remington McMansion. They met with Beth Kocur, a broker for NVR Mortgage, a wholly owned subsidiary of NVR, Inc. Kocur brokered two fixed-rate loans from the now-bankrupt American Home Mortgage.

The Rioses heard a range of estimates on their monthly mortgage payments. On their initial visit, they were quoted $1,800. Before they put their money down, NVR revised its estimate to between $2,800 and $3,000. The Rioses still thought they could swing it. But after they made a deposit and signed a contract, they say they couldn't get a straight answer from Kocur on the monthly payments.

"She just kept telling us, 'Don't worry, everything is all right. The bank had approved the loan,'" Marcos says.

When they arrived at the Manassas office for the closing, they say, they learned for the first time that they were facing a monthly payment of $4,383.

"If we had known," says Marcos, "we would not have bought the house."

They tried to call off the deal. But the two officials from the lender warned they would lose their $53,000 deposit.

They didn't really want to cancel it anyway. After all, they already had an attachment to the place that most home buyers never feel. Through a special arrangement with the developer, the Rioses had done all the foundation and cement work on the house themselves and were excited about moving into a place that they had labored over. So when the lending officials promised they could come back anytime to refinance and lower the payments, they relented and signed the loan documents.

They spent that summer enjoying their new house and settling into the daily routine. They rented their house in Manassas. They were feeling good about the move.

As the winter closed in, the family's fortunes turned. Keeping the lights and heat on in the new house was costing upward of $1,000 a month, more than double the bills they had paid in Manassas.

José ruptured a disc in his spine. His employer's insurance company paid for the operation. But he was out of work for about four months. His workers' compensation pay was much less than what he had made on the job. Also, he owed thousands of dollars to Georgetown University Hospital for treatment Jacqueline received in 2005 after she put her hand through a window, severing an artery.

Six months after closing on the big house, their loans had been sold to two other mortgage companies. When the Rioses called about refinancing, they say they were turned away.

"They told us that we could come back any day we wanted to and refinance," Marcos recalls. "ButŠwhen we tried, they said it wasn't possible. Since we were paying on time, they said everything was fine, and we should just keep on paying."

(A spokesperson for Countrywide, the lender that bought the larger of the two Remington loans from American Home Mortgage, says the company referred the Rioses to its foreclosure prevention unit but the Rioses never called to follow up. The Rioses say they were told they'd have to fall at least two months behind before Countrywide could help them.)

When they couldn't refinance in Remington, they went back to Paternina to see about cashing out more equity from their Manassas home. She ran the numbers and turned them down. The house was now apparently mortgaged beyond its market value.

A Classic Case

Since the deals closed, Fannie Mae and Freddie Mac have published Spanish translations of several fixed and adjustable rate instruments to help Spanish-speaking buyers understand what they are signing.

Considering mortgage documents confuse people with no language barriers, it's hard to say if Spanish versions would have saved the Rioses from making the deal. As it was, they didn't even try to comprehend them. And they didn't have the papers reviewed by a lawyer or real estate expert, a common but tragic mistake made by many home buyers, advocates say.

Such a review would have turned up a number of red flags. The Washington City Paper asked two experts to review the Rioses' home purchase: Paula Sherman, a mortgage default counselor with Housing Opportunities Made Equal Inc., a Richmond nonprofit, and Diane Cipollone, an attorney and homeowner advocate with the National Fair Housing Alliance, a consumer group headquartered on New York Avenue NW.

"This is a predatory lending case. This is probably one of the most classic cases that I've seen," says Sherman.

(Photograph by Charles Steck)

The problems with the transaction started with the deal that made it all possible: The refinancing scheme on the brothers' first home. The Rioses also used cash from that deal to pay off $14,000 in medical bills and the $32,000 balance on their new red Toyota pickup.

Tack on $9,568 in closing costs, half of which broker Paternina charged on the transaction, and the Rioses were well on their way to squandering their financial footing. "What was a need for $53,000 cost this family probably three times that amount," says Cipollone.

Paternina did not return a phone call seeking comment. However, East West Mortgage Vice President J.C. Jimenez says the mortgages and the fees were "nothing out of the ordinary" and questioned whether the Rioses truly understood the terms.

"They never expressed any dissatisfaction to the point that they came back to the same broker to get more cash," he says of the failed final effort to take cash out of the Manassas property.

"If they would have stayed in a property that they could afford, they probably wouldn't be in this situation," he says. "They just want to find somebody guilty."

The Remington purchase also had some pitfalls. NVR's mortgage, settlement, and insurance subsidiaries charged a slew of fees that, according to Sherman and Cipollone, drove closing costs through the roof, to more than $23,000. "Unbelievable!" Sherman says. "But it's not illegal."

According to Sherman, who says she had never seen such high fees, closing costs for a home like the Rioses' should be $15,000, max.

The Rioses also walked away withŠmore cash! While they had deposited $53,000 with the builder of the Remington house, they accepted an offer to return $33,000 to them at closing. At the time, they didn't realize that taking the money back would push up the ultimate cost of the house.

Nor were the Rioses getting the most favorable loans on the market. Despite credit ratings in solidly "good" territory and the equity they'd built during the three years they owned their first home, the Rios brothers were sold a species of home loan often referred to as "subprime" because interest rates and repayment terms are less favorable than with the standard prime rate mortgage.

Of the two loans brokered by NVR, the first was a fixed-rate vehicle charting interest above the prevailing prime at the time. The second loan is a "balloon note." It was for $151,064 and carried a 10.8 percent interest rate. If the Rioses managed to keep up with the payments, they would still owe nearly the full principal amount of the loan at the end of 15 years, when a final "balloon" payment of $129,966.68 would come due.

"Even after 15 years, they'd still owe a humongous amount," says Sherman. "It puts them in a place where in 15 years they are probably going to have to refinance again-probably another 30-year loan. So, in essence, they will have a 45-year mortgage."

NVR broker Kocur didn't return calls to her office. NVR, Inc. declined to comment.

Barbara C. Lawrence, a former underwriter with American Home, says balloon loans were originally conceived for well-off and savvy borrowers, who knew how to use them to financial advantage. By the height of the boom, however, they were increasingly mass-marketed as second mortgages in lieu of the traditional 20 percent down payment, says Lawrence, who was the trustee on the Rioses' loans before being laid off from American Home Mortgage in August. While she doesn't remember the Rioses' transaction, she says Kocur brokered many balloon notes on behalf of Hispanics who were purchasing homes in NVR's Remington development. During the boom, she says, it was routine to have 20 to 45 loans in your "pipeline" at a time, and the hours were long.

"To me, it was almost like a frenzy, sometimes," says Lawrence, who defended her former employer as "ahead of its time and a good company." She takes offense to claims that American Home was selling "subprime" mortgages.

"You can be looking at a loan and thinking, 'Why is this person doing this to themselves?'" Lawrence says but adds it wasn't her place to tell the buyer they might want to rethink the transaction. "If they're qualified and meet all the conditions, it's not up to me to do that. You know your pocketbook. You know your circumstances."

After the biggest real estate market run-up in history between 2001 and 2005, loans are now failing in droves. The nation's foreclosure rate hit a record high in the second quarter of this year, and economists predict more trouble as about $1.1 trillion in adjustable-rate mortgages reset for the first time this year and next. Advocates for homeowners say false advertising and outright fraud lulled borrowers into treating their home equity like a piggy bank, leaving millions holding the bag when the real estate bubble burst. Like a game of musical chairs, borrowers, who had become "serial refinancers," found the music stopped before they could unload their expensive adjustable loans.

The fallout for the mortgage industry has been enormous. NVR and other home builders have seen profits and stock prices plummet. The bankrupt American Home Mortgage has laid off 90 percent of its employees. Countrywide reports nearly $600 million in losses from foreclosures in the first six months of 2007 and will lay off as many as 12,000 workers by December. GreenPoint Mortgage, provider of the refinancing on the brothers' Manassas home, has stopped making new loans.

On the Brink

The scenery between Manassas and Remington includes horse farms, bales of rolled hay, and the occasional winery. From time to time, farmland gives way to strip malls and clusters of new cookie-cutter houses with the same beige vinyl siding and steeple roofs.

These are Washington's newest outer suburbs. They're dotted with the kinds of homes the Rios brothers helped build, sweeping away farmland and pushing home prices skyward.

Just off Route 29, Remington's tiny business district has retained much of its small-town charm. The country lane leading to the Rioses' development is aptly named Tin Pot Road. It's barely wide enough for two vehicles to pass. After meandering through the woods and over a trickling creek, the vegetation falls away to reveal an entire community in various stages of construction. The brothers' Oberlin model is on Riverton Court, nestled in the middle of the enclave before the road disappears again around a bend and into the forest.

The pastoral setting, the enormous rooms, the Jacuzzi, the bad loan terms-it was all too much for the Rioses to bear. They exhausted their savings and stopped paying the Remington loans in July. They're desperate to sell or negotiate with their lenders. The house is on the market for $550,000, about 20 or 30 percent higher than the other houses that aren't selling on the street.

While the house was appraised for that amount only a year ago, the real estate economy has adjusted the balance sheets: Comparables are going for less than $400,000 today. Since that figure is far less than what the Rioses owe on the property, they're trapped in something called "negative equity." They'd have to secure their lender's agreement to sell the house at its current market value.

Their dream is teetering on the brink of foreclosure. Their good credit ratings are in the gutter. Like millions of other people who signed for pricey loans during the height of the real estate boom, the Rioses fell behind on payments they couldn't afford in the first place.

The Remington house is empty now except for a few nails in the walls, where family photos and lithograph reproductions of famous still-life paintings once hung. The purple and silver Bratz beads remain strung across the doorway entrance of the room shared by Tatiana and Kelly, the only remaining vestiges of the happy times the girls shared there. Outside, it's one of several houses on the same cul de sac that have for sale signs hanging forlornly on impeccable lawns.

The family moved back to Manassas just about a year after the triumphant decamping to Remington.

After a year in their Remington McMansion, the Rioses moved back to their Manassas home in July. (Photograph by Charles Steck)

People in the old nabe sympathized, shaking their heads at the family's bad luck.

David Craiger, a heating and air conditioning technician, who bought his Manassas house for $58,000 in 1980, says he watched the neighborhood of modest '60s-era dwellings appreciate in value to what seemed like an impossible level. At the height of the boom, one house on the block went for $425,000, he says. Then the city raised real estate taxes. Water prices also rose. How could people keep paying those prices?

Another Salvadoran family, two doors down from the Rioses, abandoned the home after purchasing it at the height and failing to keep up with payments, says José Flores, the Rioses' next-door neighbor.

On the Rioses' street in Prince William County, there are a half-dozen houses for sale. Countywide, foreclosures have skyrocketed, mirroring the national trend. In the first eight months of 2007 alone, lenders moved to seize more than 1,500 properties, compared to just 34 for the same period in 2005, according to the data provided by the Prince William County Circuit Court clerk's office.

Adjusting to the Bust

The Rios brothers don't like to talk about what moved them to buy the showplace in Remington. And they don't get into the emotions that led them to sign the mortgage documents when they wanted to back out of the deal. They have enlisted their real estate agent, Frank Rourk, to sell the place. Rourk is a personable Nicaraguan who immigrated here decades ago. A former graphic designer, he has built a thriving real estate business catering to the large Central American communities in and around Manassas. His friendly manner and English skills made him an adroit go-between for up-and-coming Hispanic immigrants and the English-speaking officialdom of the real estate world. During the boom days, many clients came back again and again, upgrading from condo to split-level to trophy home or purchasing second or third houses to rent to fellow immigrants who streamed into the Northern Virginia area looking for jobs.

Rourk is working overtime to sell homes he helped the same clients buy a few years ago. He has lots of listings, mostly bought at the height of the market by immigrants, who paid with adjustable mortgages. Now his clients call him for help unloading their houses. "It's hard," says Rourk, hanging up the phone with one recently foreclosed-on customer.

Frank Rourk, who sold the Rioses their Manassas home, told the brothers a half-million-dollar home didn’t make sense on their salaries. “If we had only listened to Frank,” Marcos says. (Photograph by Charles Steck)

Rourk's business has also suffered. Thanks to the downturn, he had to take a second job selling cars. He still has his silver Beamer, a reminder of the days, not too long ago, when he made more than $100,000 a year and took a few days of vacation every month.

"I was my own boss. Now I have to punch a timecard like everybody else," he says.

Selling the Rioses' house would mean a big commission. But Rourk says he hasn't had a whit of interest. Buyers are scarce. The house is even a harder sell than most since it is more expensive than other houses in the same development, a disparity arising in part because the brothers commissioned the place with lots of the extras offered by the builder.

Return to Manassas

Moving back to Manassas wasn't easy for the Rioses. Their tenants had long since moved out of the house-after stiffing them for a month's rent and trashing the place. The brothers had to spend their meager leisure time repairing the holes in the walls and carting away a mountain of trash.

If they can unload their Remington house, they stand a better chance of holding onto the Manassas abode. Today, they owe more money on that Manassas property than they did when they signed their refinance papers. Why? Because the adjustable rate in their refinance package had reset. Though it started out at 1 percent, it rose to 8 percent and could go as high as 12 percent over the life of the loan.

Where they once paid less than $1,500 for principal and interest on the Manassas house, today that payment would be $2,612. Instead of handing over all that cash, the Rioses are paying the "minimum" payment required by the bank-about $1,112. Trouble is, that payment level doesn't even cover all the interest on the loan, meaning that each day the homeowners rack up a little more debt.

What seemed like a solid investment is now leaching away their savings and a threat to their family's future.

"Everything was fine," Marcos says. "Then the interest rates started increasing, the home prices fell, and we couldn't sell. We couldn't do anything."