By Dale Kasler
Published: Thursday, May. 6, 2010 – 12:00 am | Page 1A
Last Modified: Thursday, May. 6, 2010 – 6:38 am

MOUNTAIN HOUSE – Advertised as “The Town of Tomorrow,” this new bedroom community near the Altamont Pass windmills once seemed like an ideal investment for the California Public Employees’ Retirement System.

Then the real estate bubble burst. Mountain House became the most “underwater” community in America – and much of CalPERS’ money sank along with it.

The pension fund’s $1.12 billion investment in Mountain House shrank to just under $200 million in five years, Cal-PERS records show. That’s a loss of more than $920 million, making it one of the biggest headaches in CalPERS’ troubled real estate portfolio.

For now the loss is just on paper, like a share of stock that has dropped, and CalPERS says it isn’t bailing out.

“We have made a decision to retain the asset in the long-term for the recovery of California’s housing market,” fund spokesman Brad Pacheco said in an e-mail.

The question is how long CalPERS will have to wait. Jim Lamb, a Mountain House homeowner who manages rental houses here and elsewhere, said market values are near bottom but not quite there yet. It could be years before prices return to 2006 levels.

In the meantime, Mountain House and other depressed real estate developments remain a dead weight on CalPERS’ $209 billion portfolio, administered on behalf of California’s state and local employees. Although its stocks and other investments have partially recovered from the crash, its real estate holdings lost half their value, a drop of $13 billion, in the 12 months ending last Sept. 30.

With an estimated population of 10,000 and its very own ZIP code, Mountain House is the Central Valley housing phenomenon in miniature – a stylish new town near Tracy for Bay Area commuters, fueled in large part by subprime mortgages and other dubious lending instruments. Home prices topped $800,000 at the market peak.

In late 2008, researcher First American CoreLogic released data showing that nearly 89 percent of Mountain House’s home mortgages were underwater, a higher percentage than any other community in America. “Underwater” means homeowners owe more than their properties are worth.

The study briefly put Mountain House in the national spotlight – unfairly, some residents say. First American based its study on ZIP codes, and a ZIP code containing all new homes would naturally look bad in a market crash.

“No community is exempt from what we’re going through,” said resident Celeste Farron, who estimates her $825,000 home has lost half its value. “We’re just getting hit harder because we’re so new.”

She and others say the community is holding up. Neighborhoods are tidy. There’s a sense of community. On a recent weekday the playgrounds were busy and signs advertised the Mountain House youth flag football league.

Still, the crash has left Mountain House unfinished, like many developments conceived during the boom. Landscaped lawns face fields of weeds. Sheep graze on the future golf course. While two schools have been built and a third is under way, there’s just one retail business, a convenience store. The closest supermarket is five miles away.

A multimillion-dollar bridge – designed to link the southern and northern halves of town – has been fenced off.

“It’s our bridge to nowhere,” Lamb said.

CalPERS got into Mountain House in 2005. It partnered with residential builder Shea Homes to purchase 2,500 acres – enough land for about 9,000 lots – from Mountain House’s original developer, Trimark Communities. Trimark retained some land for commercial development.

Three years later, with the market in ruins, CalPERS restructured its investment. The pension fund became 100 percent owner. Shea gave up its 15 percent share but stayed on to manage the project.

Pacheco declined to offer details of the restructuring. Officials with Shea didn’t return phone calls for this story.

Now the market appears to be stabilizing. Mountain House median sale prices have actually risen almost 3 percent in the past year, to $325,000, according to MDA DataQuick.

“At one point I had six homes on my street that were vacant; now there are two,” Lamb said.

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