Who's to blame? Everyone, say the experts, from homeowners to regulators.

DAYTON — When the bank foreclosed on A.D. and Naomi Thomas in 2005, signs of the nation's home mortgage meltdown were growing blips on the nation's radar, noticeable mostly in places like Montgomery County, where trouble came early and hard.

But by the time the bank finally took the Thomases' Trotwood home two years later, the economic explosion brought by the foreclosure crisis couldn't be missed.

And suddenly, what had been a problem mostly in economically depressed states like Ohio became Wall Street's problem. Which also made it the federal government's problem.

What Ohio Treasurer Richard Cordray calls "a massive systemic failure" on the part of the financial services industry is now roiling across the U.S. and world economies.

The foreclosure crisis deprives people of their homes and ruins their credit. It strips equity from homes and burdens neighborhoods and local governments with a raft of vacant, sometimes crime-ridden, property.

Where foreclosure happens, everyone suffers.

"Everybody's house is worth $10,000 to $20,000 less than it was worth last year because you've got vacant houses on your street," said Stephanie Y. Evans, home rehabilitation manager for County Corp, a local affordable housing agency.

Things likely will worsen when General Motors shutters the Moraine truck plant by 2010, throwing as many as 2,500 people out of work. "We're going to have more people in some of the better neighborhoods now losing their homes," Evans said.

The crisis isn't just hitting the poor or unemployed. It also threatens investors — from fat-cat hedge funds to local government investment pools to the average person's pension or mutual fund.

"The securities themselves actually suffered credit downgrades," Cordray said of the impact on investors. "It isn't necessarily the case that you can simply hold them to maturity because the security itself might go out of business and never pay off."

Sending shudders through Wall Street, the foreclosure meltdown cost 65,000 finance industry jobs in 10 months and Cordray said led American and international banks to write down more than $340 billion in subprime mortgage losses.

It poses such a threat to the economy that the U.S. government in March took unprecedented steps to prop up crumbling investment giant Bear Sterns, crippled by massive losses on high-risk mortgages and sold May 30 at a bargain-basement price to JPMorgan Chase.

"Now the Fed is fighting a crisis of confidence more than anything else," said M. Fall Ainina, professor of finance at Wright State University. "They do not want a run on the banks."

Sobering statistics

Nationwide nearly 1.7 million mortgages were in foreclosure or seriously delinquent in the fourth quarter of 2007, almost double the number from two years before, according to the Mortgage Bankers Association.

Over the next two years, an estimated one in 33 current homeowners nationally is expected to be in foreclosure, according to a new report by the Pew Charitable Trusts.

Ohio has been one of the top states for foreclosures in recent years, and the Mortgage Bankers Association found it ranked first in foreclosure inventory at the end of 2007.

Last year Ohio new foreclosure filings grew by 6.7 percent to 84,751, according to a study by Ohio Policy Matters, a Cleveland-based think tank.

"It's kind of discouraging because there is so much pain out there," Cordray said.

The distress is sorely evident locally. For example:

• Every county in the Miami Valley had a triple-digit increase in foreclosure filings between 1995-2007 except for one — Warren County — which saw filings go up more than 1,000 percent. Foreclosures there totaled 112 in 1995 and last year grew to 1,243, according to Policy Matters Ohio.

• Montgomery County had 9.5 foreclosure filings per 1,000 people in 2007, second only to Cuyahoga County, the study found.

• Montgomery County is on track this year to see more than 5,500 new foreclosures and nearly 3,300 foreclosed properties sold at auction, the point at which most owners lose their homes, according to an analysis by the Dayton Daily News.

• If current trends continue through 2008, one in every 25 homes in the county will have been sold at auction since 2005, assuming a conservative estimate that 80 percent of foreclosures are on residential properties.

And the scariest prospect might be that it's not over.

"The problem is bad now. It's really bad," said Jim McCarthy, president and chief executive of the Miami Valley Fair Housing Center, which assists victims of predatory lending. "Unfortunately I don't think we've seen the rest of it."

Plenty of blame

It would be simple to dismiss the foreclosure crisis as a case of people buying more house than they can afford and not using due diligence before signing high-cost mortgages.

Some borrowers did indeed make foolish financial decisions.

But advocates who work with families say there is far more to it. Job loss, medical problems, or a family crisis, such as a death, are common tipping points for financially strapped homeowners, advocates say.

"Many families in our area have been victims of the economic downturn," said Beth Deutscher, executive director of the HomeOwnership Center of Greater Dayton, a housing counseling agency.

She and others say lenders and brokers took advantage of people's confusion about increasingly complex mortgage products, and sometimes used predatory or outright fraudulent practices to write loans.

"Most of the people that we're working with were put into unsuitable loans that they could never have afforded to begin with," McCarthy said. "They relied on someone, either a broker or a loan originator, to tell them what their home was worth and what they could afford."

For many people, the biggest mistake was believing what they were told, said Evans.

"That's the bottom line," she said. "It's lack of information, lack of education and the fact that we trust."

Ohio House Speaker Jon Husted, R-Kettering, said borrowers need to do a better job handling debt.

"There has to be an element and recognition of personal responsibility as well," Husted said. "There were a lot of people who were playing a dangerous game here of borrowing and flipping properties. There were some people who just took some financial risks and got caught."

Lenders also made bad decisions, Husted said, and are paying a price.

"Some of them have been brought to their knees, some of them are out of business," Husted said. "They've had to get millions of dollars in new investment just to keep from going under."

Mortgage Bankers Association spokesman Eric Gustafson said real estate agents, builders, lenders and regulators can all share in the blame for the current mess.

But Cordray puts the responsibility for the foreclosure crisis square on the financial services industry.

"There was a lot of greed on Wall Street, where they looked at the real estate market as a cash cow," Cordray said. "It was a failed model, a flawed model."

More to come

Dayton City Commissioner Dean Lovelace has watched foreclosure wreak havoc since its earliest seeds began sprouting here in the late 1990s, when lenders began targeting the elderly, persuading them to take out high-cost home equity loans on houses they'd owned for years.

He still remembers one of those victims, a woman in her early 90s who later died.

Lovelace said the woman's daughter told him "stress and trauma took her away. She simply could not believe she was losing her house over a home improvement."

Those early signs of trouble have proven prescient. And the pump is primed for more.

Despite pressure to help homeowners, Congress has not acted on proposals that would give lenders federal guarantees if they reduce mortgages to more affordable levels. Nor has Congress moved to freeze adjustable interest rates scheduled to reset this summer and fall.

Those resets could trigger another wave of foreclosures. An estimated 8 million adjustable rate mortgages will reset through late 2011, according to a study by First American CoreLogic, a business information company.

"We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets," said Ben Bernanke, chairman of the Federal Reserve, in a May 17 speech in Chicago.

Resets — often on risky subprime loans — can have devastatingly quick results, increasing payments by at least 30 percent, according to an October report by the Majority Staff of the Joint Economic Committee of Congress.

Interest rates can rapidly jump to credit-card levels, said Montgomery County Recorder Willis Blackshear, displaying an array of local residents' mortgages with rates as high as 19.265 percent.

Lenders lured sub-prime borrowers with low two- or three-year "teaser" interest rates, with resets at rates the borrowers had little ability to pay, Deutscher said.

By the time the owner lost the home, the original lending institution had already made its money, having typically sold the loan in the secondary mortgage market.

Lenders also used the promise of low monthly payments to convince borrowers to accept interest-only loans and other mortgages that required huge balloon payments after several years, Evans said. Large prepayment penalties discouraged people from paying off loans before the rate reset, or, Evans said, many borrowers were assured they could refinance before resets.

When people tried to refinance, they found they didn't have good enough credit for a better loan. Or over-appraisals for the first loan and property value declines as the housing market sunk made their homes worth less than the amount needed to cover the first loan.

Borrowers who did refinance found themselves paying lenders additional fees, sometimes $3,000 to $5,000, Evans said.

"People can't refinance themselves out of trouble. What they did is refinance themselves into more trouble," said Stan Hirtle, senior attorney at Advocates for Basic Legal Equality, which represents victims of predatory lending.

"We see people with three, four, five loans. It's loan flipping."

The Fed's Bernanke said subprime lenders "contributed to the problems," loosening their underwriting standards, loaning money to people with poor credit histories or high loan-to-value ratios, and requiring little documentation of income.

Easy credit allowed more people to buy homes, but low down payments and low monthly payments meant people built little equity in their houses, Wright State's Ainina said.

"As long as housing prices are going up and interest rates are low, everybody's happy," he said. "Keep in mind there is an American dream behind all this: own a house."

Many people in Dayton lost that dream a long time ago.

As the U.S. housing market heated up, the mortgage industry prospered, along with the economy. But the Dayton area pretty much missed out on the economic good times, said Thomas Traynor, WSU professor of economics.

"Essentially from 2000 until 2007 we've had seven straight years of employment declines in this area," Traynor said.

So while other parts of the country were doing well, the Dayton area had a high number of bankruptcies and foreclosures for the past 10 years, he said.

"There are people who are just earning less money than before and it's hurting their ability to pay back their mortgages," Traynor said. "There were a lot of people that incorrectly bought into the idea that this would all work out."