BUDA, Texas (STPNS) -- For young newlyweds Phil and Kristine Hughes, the modest but charming little cottage in Plum Creek seemed like the American dream come true.

A new master-planned subdivision built in the style of a pedestrian-friendly small town, Plum Creek offered quaint neighborhoods with front porches and picket fences, amenities like a golf course and swimming pools, and a nearby elementary school for the children they hoped would one day join the family.

Best of all, the price was right: $118,000 for the 1,311 square foot cottage, or just $735 per month on a 30 year loan at 5.75 percent interest, barely more than the couple was currently paying for a cramped duplex in South Austin.



"I remember my mom saying 'Are you sure? It just doesn't sound right,'" Kristine Hughes recalled. "We were so naive, so giddy and excited. We just wanted out of our duplex."

Her mother's warning wasn't heeded in the whirlwind at the closing table. As a disabled Navy veteran, Phillip Hughes qualified for a VA loan and assistance on closing costs. The couple even got cash back to help furnish the new home.

Phil and Kristine, then 29 and 27 years old, moved in to their first house on May 3, 2000, and for almost two years, life was good.

"We're sitting pretty. We're making our house payments. We're never late," Phil Hughes recalled.

In February of 2002, Kristine got laid off from her job. A few days later, the letter from the mortgage company arrived in the mail. Overnight, their monthly house note increased by almost $500.

The couple was stunned, and got on the phone trying to make sense of the confusing turn of events.

It wasn't an adjustable rate mortgage or a predatory subprime loan. The Hughes family was burned by a shortage in their escrow account, the fund that collects and pays property taxes to government entities.

When the Hughes purchased their home in the spring of 2000, their mortgage company calculated their escrow payment based on the tax appraisal of the home on Jan. 1 of that year. At that point, construction on the home had just begun, and the home was appraised for the value of the raw land and the foundation slab - about $12,000.

The next year, the completed home was appraised at $117,800, and their escrow payment jumped to meet the tax bill.          

The mortgage company refused to offer any refinancing options, instead suggesting getting a renter or borrowing money from family. Kristin quickly found a new job, but with their monthly mortgage payments up to $1,200, the couple's debt spiraled out of control.

"It's a chess game not to get foreclosed on," Hughes said.

And as the Hughes learned more and more about their situation, they also learned they weren't alone. They began hearing similar stories from other residents in the area, including their neighbors just two doors down.

Hays County's population has jumped from less than 100,000 residents in 2000 to more than 140,000 today. Many of the incoming residents have purchased newly constructed starter homes in developments that were pastureland just a few months prior.  

Area real estate agents say they're familiar with shortages in escrow accounts of newly constructed homes. Often, the situation occurs when large homebuilders with lending branches handle all elements of the sale, said Tamara Robertson of ERA Millennium Realty in Kyle.

"They go straight to the builder, buy a home from the builder, and the builder doesn't tell them their taxes will go up several hundred dollars per month," Robertson said.

Continental Homes of Texas, a subsidiary D.R. Horton, built and sold the Hughes's home. Representatives from D.R. Horton did not return calls for comment.

It's unclear how many cases of escrow account shortages actually lead to repossession by the lender. But Hays County Chief Appraiser David Valle said he's seen numerous families in the same boat coming through his door, trying to find a way to escape foreclosure after their mortgage jumped several hundred dollars.

"I've seen people come in here literally in tears on situations like that, wanting to see how we can help them," Valle said.

Blake Hartman, business development officer with TrustTexas Bank in Buda, said red flags should have gone up for both the purchaser and the lender when the appraisal was so low.

In that situation, Hartman said he would estimate the taxes based on the current market value of the completed home, with a little cushion for error.

"I'd rather estimate too much than too little," Hartman said.

Sitting at the closing table can be a heady, emotional process for first-time home buyers, with a flood of new terminology and information. Some lenders, such as Broadway Bank Vice President Tim Snodgrass, say they try to make sure borrowers understand all the elements of the home purchase.

"The only way you can really get around that is educate people, and I consider that part of my job," Snodgrass said.  

The Hughes readily admit that they should have researched more about the home-buying process before they started, and know they learned an expensive lesson. Trying to avoid foreclosure and get their finances in control has been a frustrating, demoralizing process that put stress on their marriage.

Over the years they've thought about selling the house, but decided to stay put. Most of their mortgage payments in last eight years have been applied to interest, giving them little in equity. And with their credit now checkered, they're not sure if they could qualify for a new loan.  

"If we got out of it right now, I don't think we'd be able to get into another one," Phil Hughes said.