Part 1: Minnesota's new ghost towns

For a brief while, as Crystal Colvin handed out lemonade to the sweaty hopscotchers on her front porch, it seemed like a picture-perfect afternoon at the Colvin house in Albertville.

But inside, the atmosphere was tense.

Jon Colvin, 38, a telephone network technician and father of six children, had just informed CitiFinancial that he would be unable to make his March mortgage payment, and would probably miss April's, too. He hoped the news would finally scare the bank into renegotiating a mortgage he can't afford for a house he can't sell -- and now wishes he had never bought.

"It's not something I feel proud doing," Colvin said of missing the payments. "But how else am I going to get the bank's attention?"

The reckoning inside the Colvins' four-year-old home is playing out at kitchen tables and corporate boardrooms across Minnesota -- and the world. For the first time in decades, U.S. home values are plunging, dragging economies around the world down with them.

The roots of that financial crisis can be found in places like Wright County, where the combination of affordable land, cheap money and boundless optimism lured builders and families chasing big homes in the kind of brand-new subdivisions they thought were beyond their reach.

The county's population swelled nearly 30 percent in the past decade. Home prices seemed to climb with each arrival, making everyone feel rich.

But the boom has unraveled as quickly as it began. While many established Wright County neighborhoods have avoided the worst of the housing market collapse, the county ranks as one of the state's worst areas hit by foreclosures. Pockets of this county, about 30 miles northwest of the Twin Cities, have seen home prices fall 30 percent or more in the past year.

Families such as the Colvins are trapped in homes worth far less than what they paid. Speculators, who helped fuel both the boom and its collapse, are also stuck, their get-rich-quick properties now money pits.

Meanwhile, cities and townships such as Buffalo, Otsego, Albertville and St. Michael, which were in the throes of building schools, roads and expanded water-treatment plants to match their growing populations, are left with big bills and the prospect of a dwindling tax base.

There are few trees or hills in this flat, predominantly rural county to obscure the evidence: Rows of vacant and unfinished homes, often with lockboxes on the front doors and foreclosure notices taped to the windows. Realtors call them "see-through houses," so empty of furniture and curtains that it's possible to see right through them.

"Based on what I see out here, we're headed for the Great Depression," said Dan Frie, a sales agent with Wright Sherburne Realty in Monticello, who has been in the business nearly 30 years.

While Frie blames fraud for exacerbating the problem, many of the mortgages that are in default are held by people who believed -- as many did and as the real estate community told them -- that real estate doesn't lose its value.

"And just because the national economy recovers doesn't mean that our local economy will recover, and that's what I'm worried about," Frie said.

Creameries to communities

Wright County is close enough to the Twin Cities to invite sprawl yet still rural enough that it's easy to miss new developments, with evocative names like Sundance Ridge and Rodeo Hills.

The county was settled by first- and second-generation German families that operated small dairy farms and delivered their milk to area creameries. After World War II, many of these farmers began working second jobs to make a living.

As the highways got closer, they began selling their land off to developers.

By the late 1990s, with the Twin Cities suburbs filling fast, Wright County was a bargain for developers. In sleepy rural communities like St. Michael, land could be had for less than $10,000 an acre -- just a quarter of prices closer to the Twin Cities.

"The land was inexpensive, the community was cooperative and it was just a 10-minute drive past Maple Grove," said Hans Hagen, a Fridley-based home builder and developer, and one of the first to reach into Wright County. His pitch to lure buyers: "Drive 10 minutes and save $10,000."

And buyers did. In St. Michael, the largest city in Wright County, almost 1,600 single-family houses, townhouses and condominiums were built between 2002 and 2007. In Otsego, almost 2,200 units were built during the same period. The county's average sale price jumped from $180,102 in 2001 to $234,009 in 2007, an increase of 30 percent. In Albertville, the gains were even sharper: 43 percent.

"In 2005, my dog could have sold real estate in Wright County," Frie said. "A lot of people thought this was the next big growth market, and they wanted to be part of it."

Buyers said they were lured by easy credit -- often from aggressive loan officers who looked past their checkered credit histories and unstable income. Many of these loan officers worked for the financing arms of local builders, which had a vested interest in getting the houses sold regardless of whether people could afford them, real estate agents said.

Subprime mortgages, which charge higher rates to riskier borrowers, proved especially popular. In Wright County, the percentage of homes purchased with subprime mortgages doubled from 13 percent in 2004 to 26 percent in 2006 -- two and a half times the rate in Minnesota as a whole.

When the bottom fell out of the housing market, many homeowners found themselves in a virtual equivalent of debtors' prison, unable to refinance loans that are now larger than the value of their homes.

"A lot of people out here feel trapped," said Dave Petersen, an agent with Keller Williams in Elk River, who has sold numerous houses in Otsego and St. Michael. "They were enticed by easy credit to buy houses that were never worth what they thought they were worth."

Ghost town subdivisions

Newly married in 2005, James and Angela O'Hara, 25, fell in love with a tidy two-story townhouse in St. Michael with a brick façade, wood floors and stainless steel appliances. The townhouse was to be part of a mixed-use project called "Town Center of St. Michael," which was designed to be a walk-about community with an urban feel.

A real estate agent urged the couple to buy early, noting that other buyers would bid up prices by 5 to 10 percent once the rest of the project became reality. The couple were shown idealistic renderings of the project that featured narrow streets and small storefronts mixed in with housing and offices.

"They sold the vision as much as the house," James said. "They said it would be this bustling neighborhood with all these attractions just a block away. We never imagined it would lose value."

But the vision never materialized.

Builders began pulling out of the project two summers ago, after the housing market collapsed. The shops and restaurants have been slow to arrive, though construction of a retail building is expected to begin next month.

"Everyone counted on the new residents [in the townhouses] to make it succeed," said Gary DiPilato, a sales agent with Darkenwald Real Estate, which is responsible for commercial land sales and retail leasing on the project. "Retailers need bodies to come in."

Instead of living in a bustling urban village, the O'Haras look out on a field of weeds and townhouses with "Bank Owned" signs posted on their front doors. Several of the townhouses are clad in Tyvek HomeWrap, their brick facades still unfinished.

The O'Haras need to move out of their townhouse by next summer, when James, a staff sergeant in the Marine Corps, reports for officer's training in Virginia. But the couple fear they won't be able to sell the unit for enough to repay the $190,000 mortgage. "It's become a huge albatross around our neck," James said, as he walked their dog, Oscar, through knee-high weeds in a field behind their house.

There are several ghost town subdivisions like the Town Center of St. Michael across Wright County.

The county is on pace to have a record 1,080 foreclosures this year, up 43 percent from a year earlier. That total is more than all the new houses built in fast-growing Albertville during the past six years.

In Otsego there are 138 vacant houses. The vast majority are located in subdivisions built within the past five years. "The newer the project, the harder it fell," said Bruce McAlpin, an agent with Edina Realty in Monticello.

In Otsego Preserve, a new housing project just a mile north of Interstate 94 in Otsego, more than half of 128 houses are vacant, according to city officials.

Some houses in the subdivision have been empty or unfinished for more than a year. Garage doors are missing, unopened mail clogs mailboxes, and dormant lawns have turned into tangled masses of weeds. Some homes are priced for $80,000 to $100,000 less than their original price.

"A lot of the prices that people were paying for property in Wright County had no basis in reality," said George Schmidt, a real estate agent with Remax in Anoka. "They were destined for foreclosure."

The good life gone awry

Not far from Otsego Preserve, a real estate developer and two investors spent $1.5 million preparing 350 acres of farmland for an ambitious new "master-planned community" called Martin Farms, which was to include up to 400 homes priced between $350,000 and $550,000. They installed a swimming pool, clubhouse, several gazebos, soccer fields and walking trails. A large sign invites passersby to "Step Up to the Good Life."

But 18 months ago, after the initial houses didn't sell, the national builders who bought many of the lots in Martin Farms pulled out. Though all the amenities are still there, few people are living in the subdivision to enjoy them. The 30 houses that were built are now on the market for as low as $200,000 -- about half the original asking price.

Jeffrey Schoenwetter, chief executive of JMS Homes in Eden Prairie and one of the investors in Martin Farms, said 400 houses didn't seem excessive when the project was hatched in 2004. The project kept growing in size, he said, based on demands from builders.

"When you have 10 builders come to you and say, we want to buy 10 lots a year, and then Mr. Builder says, 'I have five friends that want to come, too, could we have 100 lots?' Then I said, 'OK, I'll develop 100 lots.'"

Added Schoenwetter: "Builders were part of the problem. They kept moving forward when the wheels on the machine were wobbling and the tires were about to blow."

As recently as last year, after the housing market had already shown signs of weakness, developers were throwing six-figure parties to market their projects.

In the spring of 2005, more than 150 real estate agents showed up for a party to showcase new upscale homes at the Riverwood National Golf Course in Otsego. So many agents wanted to list the new houses, which were priced at up to $800,000, that a line of parked cars stretched a half-mile through the golf course.

Today, about one-third of the 74 houses and townhomes in Riverwood National are vacant or in foreclosure. Empty lots bought for $139,000 or more sit vacant next to golf greens.

Laurie Karnes, a real estate broker who specializes in selling undeveloped land in the Twin Cities, blames today's problems on greed and a failure to acknowledge that the good times wouldn't last forever.

"Logic would have told you, why would you build there?" Karnes said of some of the county's overdeveloped communities. "But logic wasn't fueling this craziness."

No one to bid

In a sign of just how depressed the housing market is in Wright County, almost no one shows up for the sheriff's auction of foreclosed homes held each morning in a tiny room with faded carpets in the Wright County courthouse in downtown Buffalo.

The home's owners and the occasional investor used to crowd into the room to bid on their property. But these days, the only bidders are representatives of lenders that own the mortgages. The auctions typically last no more than a few minutes.

In the past four months, 86 percent of the homes sold in Wright County were bank-owned and 7 percent were "short sales," or deals that were negotiated by homeowners who owed more than the house was worth, according to calculations by Frie.

And those cut-rate deals are undercutting values of houses throughout the county. "The values we're putting on houses is equal to what they were five years ago," he said. "And [homeowners] can't compete with lenders who are discounting them."

Wanting out

The Colvins have considered selling their house to avoid a foreclosure. But based on recent sales in their neighborhood, the couple estimates that the most a buyer would pay for their house is $250,000, not enough to pay off the couple's $330,000 mortgage after two refinancings.

The Colvins say they were lured to buy their home, in a newer subdivision in Albertville called Heuring Meadows, by a mortgage broker with First Priority Mortgage in St. Michael. The broker, Paul Reese, said they could get around Jon's poor credit record with a higher-interest loan, which they could refinance after six months. By then, the property would be worth even more, so they could even take some equity out of the home and pay off some bills.

But the bank wouldn't refinance, and with some missed payments, the couple's interest rate stands at 10.5 percent.

Reese said the refinancing plan he worked out with the Colvins might have worked had the couple stuck to his instructions. "Unfortunately, in this market, it seems like people are looking to blame whomever they can for their own mistakes," said Reese, who has since closed his mortgage company.

The couple have spent the past six months trying to negotiate a new mortgage with their lender, CitiFinancial, but the bank said it is focusing on borrowers with more serious problems. Jon, who's working a second full-time job at night and on weekends, decided to stop making the payments and put the money in a savings account.

"It's a sad state of affairs when you have to miss a payment to get the bank to return your telephone calls," he said.

Hilary Brueck, a University of Minnesota student reporter on assignment for the Star Tribune, contributed to this story.

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