Ten years ago, Lauro and Yolanda Navarro moved with their six kids into a trailer on a 3-acre plot of land just east of Pajaro and planned to build their dream home. They had worked since they were teenagers – Lauro in construction and Yolanda in a cannery – and figured they could afford a little more than $3,000 in monthly payments. No problem, according to their mortgage broker, who arranged a $650,000 loan and prepared the paperwork.

The Navarros signed reams of loan documents without taking a close look, believing that their broker was not only on their side, but under government oversight.Seven years later, the house – a four-bedroom beauty with recessed lighting and a fireplace – was built, but their initial monthly mortgage payment of $2,800 had doubled. At the same time, Lauro lost his job, and Yolanda developed carpal tunnel syndrome and had to take medical leave from work.

“At first we didn’t even want to open the mail,” Lauro says, because it was filled with bills he and his wife couldn’t pay.

When they called their lender, First Horizon of Tennessee, to modify the loan, they were told to get in line; the company was handling millions of dollars in delinquencies. They learned their mortgage broker had wildly inflated their income on the loan application and that the lender never demanded proof of their earnings.

In desperation, they handed over $3,000 to a company that promised to help change their loan terms, but did nothing and simply walked away with their money.

By the time they tried to refinance in 2007,foreclosures were epidemic and credit had all but dried up.

Last Sunday, the Navarros joined more than a hundred others for a crash course in Foreclosure 101 at an Aptos synagogue. While Yolanda and Lauro are blue collar, most of their fellow attendees looked like Whole Foods shoppers with college degrees and desk jobs. Indeed, Santa Cruz attorney Bill Purdy says, foreclosures have gone middle class.

“It’s spread into Pebble Beach and Carmel,” he says. “Middle-class people didn’t fall right away,” he explains, because of 401(k) plans or savings. “They’re falling now.”

Although county foreclosures are down by at least 10 percent last year compared to their peak in 2008, Purdy and others expect another wave of foreclosures to pummel the county as rates on a new crop of adjustable mortgages rise later this year.

Successful loan modifications are still scarce, Purdy says, adding that the federal programs to encourage them, like the Obama administration’s Making Home Affordable initiative, haven’t eased the pain for his clients. Some lenders are overwhelmed and lack the staff to modify loans. Plus, he says, lenders have perverse incentives not to work with borrowers. They can choose to collect 80 percent of a foreclosed home’s value in insurance or take $2,000 a month for 30 years. “It’s the time value of money,” Purdy says. And, he adds, lenders can write off foreclosures on their taxes.

There is a silver lining for homebuyers: People are still getting deals on bank-owned homes. “The market is alive and well,” says Sandy Haney, CEO of Monterey County Association of Realtors. “We just need the inventory.” Last year saw a 56 percent drop in available in homes for sale compared with 2008.

Scott Walker, a management analyst for the county Treasurer-Tax Collector, says banks may have held back their inventory to prop up the housing market. Although about 4,400 homes were scheduled for auction last year, only about two-thirds were sold.

Local government agencies and one nonprofit plan to convert that inventory into opportunity for low – and moderate-income homebuyers. Monterey County is working with six local cities to scoop up about 25 foreclosed homes before they reach the market, do green upgrades and resell them. County Program Manager Jane Barr says the Board of Supervisors will vote on the specifics of the $2.1 million Neighborhood Stabilization Program grant Feb. 2.

“We are looking at rolling out this program mid – February, and we expect to have approximately six to eight houses in escrow by the end of March,” Barr says.

The city of Salinas, meanwhile, received $2.6 million to buy up abandoned homes, while affordable housing builder CHISPA was recently awarded $5 million to buy, renovate and sell about 55 foreclosed Salinas Valley properties over three years. “We want to clean up some bad neighborhood houses, get them in good shape and put them in the hands of lower – and moderate-income families,” says Dana Cleary, CHISPA’s director of real estate development.

As for the Navarros, they’ve joined a local church-based activist group to campaign for loan modification. “Pain, anger and shame,” Lauro says are what his fellow foreclosure victims are feeling. But he and his wife have shaken off the guilt. “Wall Street is to blame,” he says.

The Navarros are considering bankruptcy while still hoping to renegotiate the terms of their loan.