Predatory Mortgage Brokers And Lenders Made Loans That Were Designed To Fail If Not Refinanced

17 11 2008

“These lenders that have gone out of business and bankrupt were making loans that were designed to fail.”


“…Housing analysts have characterized the problems in the South Bay as young, first-time home buyers being taken advantage of by predatory lenders. But Little Lake Street attracted people of all motivations: amateur investors, speculators and even one man who said he was part of a fraud scheme. More than half of the buyers gambled by purchasing multiple properties during the housing boom, according to deeds filed with the county…”


Greed and naivete collided on Little Lake Street in the fall of 2004.

It produced easy money for specula-tors and mortgage brokers and short-lived happiness for families who bought houses they couldn’t afford to keep. Few streets in the county have witnessed as dramatic a turnaround as Little Lake.

Nestled in the heart of the sprawling Otay Ranch development in eastern Chula Vista, the new homes generated so much interest that people spent months on waiting lists, just for the option to buy.

Prices on one block peaked in 2005, a few months after homes hit the market.

Since then, 13 of the 23 houses – 57 percent – have fallen into fore-closure, making it one of the tightest concentrations in the county, according to a San Diego Union-Tribune analysis of MDA DataQuick information.

Subprime loans, the high-interest mortgages sold to people with blemished credit, were rampant in the census tract surrounding Little Lake Street. Of the 3,600 loans sold in that tract in the past three years, more than 1,000 were subprime.

That’s the most of any tract in the county, according to a Union-Tribune analysis of federal data.

But the problem wasn’t confined to subprime mortgages. Many home buyers gorged on easy credit. Tempted by persuasive mortgage brokers and lenders, they bought multiple half-million-dollar homes completely on credit, most with terms to pay only interest or adjustable interest rates that quickly soared.

About 12 percent of foreclosed properties likely belonged to investors who walked away from at least two houses in the past three years, the Union-Tribune found in an analysis of the 30 census tracts in the county with the highest rates of foreclosure.

On Little Lake Street, the owners who were forced to give up houses are people of modest means — construction workers, a postal service mechanic, a community college instructor and a Navy couple, among others. Many are minorities and immigrants with little education. Most are in their mid-30s to mid-50s.

Housing analysts have characterized the problems in the South Bay as young, first-time home buyers being taken advantage of by predatory lenders. But Little Lake Street attracted people of all motivations: amateur investors, speculators and even one man who said he was part of a fraud scheme. More than half of the buyers gambled by purchasing multiple properties during the housing boom, according to deeds filed with the county.

Looking back, several say they erred by trusting mortgage brokers and lenders who told them they could afford it. Some feel a twinge of guilt about the nation’s credit crisis and the role their bad mortgages played in prompting the historic $700 billion government bailout passed last month.

They continue to struggle with the emotional toll of losing their homes and grapple with what they consider the unfairness of it all. During the overheated market, thousands swarmed the South Bay and took out risky mortgages.

“All people did it,” said JesÚs Muñoz, a construction worker who lost his Little Lake Street house in March. “They were investing and selling. If other people can do it, why not me?”


An idyllic setting

Little Lake Street doesn’t look its part as ground zero for San Diego’s foreclosure crisis.

The houses were designed to reflect country French architecture when they were built four years ago. Many are 1,600 square feet and feature stone and brick archways and old-fashioned shutters painted in olive greens, slate blues and sunny yellows. Neatly trimmed bushes line the fronts of houses. Chimneys peek over second-story roofs.

The street is quiet these days. Several homes are vacant, a couple of which have bank-owned for-sale signs staked out front.


NANCEE E. LEWIS / Union-Tribune
Little Lake Street in the Otay Ranch community of Hillsborough is an epicenter of the county’s foreclosure crisis. Some houses have sold at auction for up to 50 percent less than their selling prices in 2004, when they were new. Some homes are vacant, with bank-owned for-sale signs out front.

The emptiness of the street is a stark contrast to the frenzied rush that occurred in 2004, when people lined up to buy the houses before they were built.

Many buyers on Little Lake Street, including Terry Louise Washington, said they were bombarded with messages from family, friends and co-workers to invest in property before theprices climbed out of reach. Washington, a community college instructor, heard that message repeatedly at church and even by a speaker at her high school reunion.

“I thought I did the right thing” in buying the house as an investment, said Washington, who used an inheritance from her grandmother for her $118,000 down payment. “People told me it’s the way to make it in life.”

Washington is one of four foreclosed homeowners on the block who put down more than 5 percent. She is the only one who did not refinance and retrieve the down payment before losing her house.

John and Helen D’Ercole, longtime Navy employees, felt they weren’t taking a risk when they bought the house a few doors down for $513,000, with a $200 down payment.

More than half of those interviewed said they rented out the homes.

Some were looking to turn a quick profit.

Joseph Spinali, a mechanic for the U.S. Postal Service, said he was hired by a real estate agent who promised him $10,000 to use his name and credit to buy and immediately sell a house on the block.

Spinali said he was a “strawbuyer,” meaning he only posed as the buyer in loan documents. The deal went sour, Spinali said, when the market tanked.

He has sued the agent, June Rhodes, saying that she never repaid $52,661 in loans and that she ruined his credit by letting the house slide into foreclosure. In a brief interview, Rhodes denied having hired Spinali as a strawman, which could constitute fraud if loan documents were forged.

“It’s very complicated,” Rhodes said. “I really don’t think it’s anybody’s business but Joe’s and mine.”

At least two buyers on the street flipped houses within weeks of their purchase, driving up property values by $20,000 and $71,000.

“There was a flipping fever,” said Carlos Aguirre, a community development specialist for National City. “There were small real estate brokerages opening up, enticing people, telling them to hold the new houses for just two or three days. It became the worst of the worst.”


Loans ‘designed to fail’

The loans sold on Little Lake Street featured some of the riskiest and most expensive elements available at the time: no down payments, adjustable interest rates capped as high as 14 percent, interest-only or negative amortizing loans and prepayment penalties, which assigned hefty charges for refinancing.

“So many of these loans were predicated on the idea that they would be refinanced,” said Kevin Stein, associate director of the California Reinvestment Coalition, which works with nonprofits to counsel distressed borrowers.

“These lenders that have gone out of business and bankrupt were making loans that were designed to fail.”

It didn’t take long for Little Lake home buyers to run into problems.

Several defaulted on their mortgages before their interest rates ever adjusted upward, according to county deeds.

The combination of the banks’ loose underwriting, the weakening economy and declining home values trapped many people, Stein said. When housing prices were rising, owners were able to refinance or sell to avoid falling behind on payments. But in a falling market, there was no way out.

Mary Ann Erickson helps families struggling with the threat of fore-closure at the San Diego nonprofit Community Housing Works. Time and again, Erickson said, she encounters Latinos who signed up for loans through family members and friends who had little lending expertise.

“The brokers were totally uninformed,” said Erickson, who has reviewed scores of loan packets. “I don’t even think these people knew what the repercussions of their deals would be.”

Several of the Little Lake Street families said they couldn’t remember the names of their mortgage brokers. They were just friends of friends.

Some now question the figures in their loan documents.

Ernesto Guevarra, a health care worker who lost his Little Lake Street house last year, provided the Union-Tribune with loan documents quoting finance charges of $4,000 that jumped to $30,000 at the time of signing. Guevarra reluctantly paid the fees by including them in the loan.

He said he was pressured to sign the paperwork despite the sharp increase in charges. He also said his broker quoted a lower interest rate that never materialized, and inflated his bank account balance on statements to qualify for a larger loan — though Guevarra was unable to provide copies of forged bank statements.

An official at the mortgage brokerage, Millennium Financial and Realty in Chula Vista, said the company never falsified documents or forced Guevarra to sign the contract.

“I think Mr. Guevarra is mistaken about what he remembers,” said Eliel Guerrero, Millennium Financial’s president.

Guerrero blamed the lender, Argent Mortgage, for providing an incorrect estimate on the original fees. Millennium pocketed $18,600 in the transaction, a 3 percent commission, which Guerrero said is “not excessive.”

Mortgage brokers say it’s unfair to blanket them with blame.

“Credit was lax,” said Ed Smith Jr., president-elect of the California Association of Mortgage Brokers. “The problem wasn’t the distribution channel. It was the availability of the loans.”

Guevarra is not the only Little Lake property owner who faults others. One accused his seller of swindling his down payment. Several criticized their lenders for not renegotiating their mortgages when they lost work. Others blame the government for lax oversight of the lending industry.

Without documentation and hard evidence to prove wrongdoing, law enforcement officials say it’s virtually impossible to conclude who is at fault.

Michael Groch, who heads the economic crimes division for the District Attorney’s Office, said his staff is researching and investigating about double the number of real estate fraud cases from two years ago. But Groch is hesitant to say just how large a role wrongdoing and fraud played in the county’s foreclosures.

“Sometimes when people are in a difficult financial situation, such as foreclosure or bankruptcy, they look for explanations that aren’t as embarrassing as their having made mistakes,” he said. “But other times, they are victims of crime, especially these days.”




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