Dominion National Bank has foreclosed on the Old Town Station luxury town house development off Rte. 1 in Alexandria and yesterday auctioned off seven of the homes there at discounts of about 25 percent from the most recent sales price.

The winning bids on the two-bedroom, 2 1/2-bath town houses ranged from $92,500 to $100,100, sharply reduced from the $126,000 to $133,000 other homes in the development had been selling for.

The 33-unit project is bordered by a busy portion of Rte. 1 and railroad tracks near the intersection with the Beltway. It is south of Old Town Alexandria and across from an urban renewal area.

About 50 persons attended yesterday's auction, but only a few actually made bids. Most of those who did said they wanted to buy as an investment, although two successful bidders said they planned to move into the homes.

The most spirited bidding was for a large end unit facing Rte. 1, which eventually went for the day's high of $100,100 to Herb Seager of Maryland. Seager, who said he had spent a day of research on the development and who plans to move into the town house, finally outbid William McDonald, who said he was buying for an investment. McDonald was the successful bidder on the three other end units.

Daniel Bragg of Dominion National was the most frequent bidder, however, keeping the bids high enough to protect the bank's interest in the property. In the end, the bank retained 12 of the 19 units it was trying to sell. Fourteen town houses already had been sold, and the bank will try to recoup its money on the project by selling the 12 homes there it now holds.

Auctioneer Tom W. Reese tried to keep up interest in the bidding, but the last six went quickly to the bank. "We don't want any cheese; we just want to get out of the trap," he exclaimed at one point, trying to convince the crowd that the town houses were a bargain.

The total bid on all 19 units, including those the bank retained, was $1.75 million, slightly more than what the bank was owed on the project, according to the bank's attorney. The 19 units then were offered together to anyone who would make an offer higher than $1.75 million, but there were no takers.

The foreclosure is one more vivid sign of the depressed state of the housing market. David Lane, an attorney representing Dominion National, blamed the failure of the development on high interest rates that have put a new home out of the reach of most potential buyers.

Seager, one of the successful bidders, agreed that that was why he was at the auction in the first place. He said he normally would be in the market to move up to a home worth $250,000 but, because of interest rates, a house of about $100,000 is what he can afford now.

Lane said the bank and the developer, Walter Robbins, worked out an agreement in September for price reductions and sales goals. When the goals weren't met and the developer could not carry the cost of the property anymore, the bank and developer decided on the auction as the best way to try to sell the homes before the bank took them over.

"It was a friendly foreclosure," Lane said. "We're pleased with today's results."

Auctioneer Reese said he is conducting about 50 percent more foreclosure auctions now than a year ago, but most of these are on homes where individual buyers have gone into default.

Another luxury town house project in Alexandria, Waterford Place, went bankrupt last year and was taken over by its construction lender. National Capital Developers, the developer of that project at Duke and Union streets, also blamed high interest rates and the economic recession on that failure.