Because of declining residential values and adjustable mortgages resetting to higher rates, the city of Napa’s affordable housing program is losing two single-family homes.

Both owners got in over their heads when their adjustable mortgages reset to higher rates. They couldn’t afford the increased monthly payments, said Jan Maurer-Watkins, manager of the city’s housing authority.

Making matters worse, each house had lost more than $100,000 in value. The mortgages exceeded what the houses are now worth,  Maurer-Watkins said.

The housing authority got involved because both houses — one on Marin Street, the other on Bremen Court — were in a pool of 230 city properties in a low-income first-time buyers program.

In 2003, the authority put up the down payment for the house on Marin Street. Because of declining values, the authority will lose $56,400, Maurer-Watkins said.

The authority won’t lose any money from the foreclosure on Bremen Court, but the house will drop out of the city’s low income home ownership program, she said.

Last October, the Bremen home was estimated to be worth $520,000, while loans on the property totaled $558,000. This included $100,000 in equity that the owner used to pay off consumer debt and fix up the property. City staff estimates today’s home value at $430,000.

When staff briefed the City Council earlier this month, council members were dismayed to hear that two local properties under city oversight were ensnared in America’s real estate problems.

If housing prices had not plunged on the two properties, the housing authority would have been able to exercise its first right of purchase, then resell them to other low-income families, city officials said.

Andrea Clark, the authority’s administrative assistant, said there were relatively few families in the first-time-buyer program who bought using adjustable rate mortgages.

Authority staff had steered most of them into fixed rate mortgages that provide financial stability when interest rates are rising, Clark said in an interview.

Some families were victims of “predatory lending,” Clark said. Lenders offered exceptionally attractive introductory rates, leaving borrowers vulnerable if rates rose sharply, she said.

“The fundamental question is, will the real estate market turn around next year?” Maurer-Watkins said. “If it does, we’ll see less of these. If it doesn’t, we’ll see more.”

Council members asked staff to tighten controls on when families are allowed to refinance and take equity out of their home. It might make sense to use equity to finance home improvements, but not to pay off routine debt, they said.

In the future, borrowers will be required to get fixed-rate, 30-year loans, Maurer-Watkins said.

The housing authority has more than $1 million available this year for qualifying low-income families who want to buy their first home.

Because this money is used to cover the down payment, lenders are willing to loan at attractive rates to families with good credit histories, Clark said.

The funds come from the state’s HOME Investment Partnership Program. Homebuyers cannot have owned a home in the last three years and cannot earn more than 80 percent of the county’s median income.

For a family of three, 80 percent of median is $55,350. For a family of five, $66,400. The maximum purchase price is $532,000.

More information is available at the housing authority, 1115 Seminary St., or the city’s Web site, www.cityof napa.org, clicking on “for residents,” then “housing division.”