Marcy in Wisconsin just lost her house. The one she and her
husband owned for 14 years and where their two children lived
since birth. Marcy contacted me during her last week in her home,
right before being evicted. Marcy and her family loved their
house, though at times it was financially tough to carry. Largely
because of family medical bills. The insurance just wasn't
enough. Marcy has a fledgling home business and her husband
is a truck driver. They refinanced their house twice, with
mortgages coming from the subprime* divisions of two affiliated,
major lenders. But even so, ends just weren't meeting. Then came
a phone call from Wisconsin mortgage broker Fred Dormutt. He told
Marcy his company "targets family households that don't have a
lot of income to help them out to ease their payment structure".
Fred didn't tell Marcy how he knew her family's income, or that
their payment structure needed easing.
A word here about names. Marcy gave me the go ahead to tell her
story, but I've changed names to protect her privacy. The events,
locations and quotes however, are as told.
In his conversation with Marcy, Fred Dormutt said her house could
be refinanced for "88". The last refinancing had been based on an
appraised value of $67,000. Which itself was raised from a prior
one of $50,000. The jump to $67,000 had factored in a potential
remodeling. Which was never completed. Eventually Dormutt sent
an appraiser to Marcy's house. Marcy and her husband paid Dormutt
for the appraiser's visit: the fee was not included in the refinancing. The appraiser, who didn't supply his name, also
didn't bring a clipboard, tape measure or flashlight. He peered
in the bathroom and a downstairs bedroom and spent 10 minutes
upstairs. Then he asked "What does Fred want to get?" Marcy
said 88. The appraiser said 87. One can only wonder what flaw
accounted for the thousand dollar difference. A creaky step?
A dripping faucet?
Dormutt then arranged a refinancing for Marcy with a subprime
mortgage lender based in California-- which I'll call "New
Centurion Mortgage". New Centurion is a national direct lender,
whose customers are both consumers and mortgage brokers. One of
their specialties is home debt consolidation. Their advertising
pitches people with credit problems, using lines such as "no
credit check" and "no employment verification" and "you can
become debt free". (Apparently money owed New Centurion doesn't
qualify as debt.) New Centurion also touts the speed with which
loans can be granted, via online transactions.
But even with an electronically sped process, in person
signatures are occasionally required. In mid February of 2001,
on a cold Saturday morning, Marcy met with agents from New Centurion at a truckstop outside of Madison, Wisconsin. 200 miles
from her hometown. The meeting had a feeling of urgency: Marcy
was told the papers had to be signed by a specific date in order
for her to "get the right financing".
After Marcy made two payments, New Centurion sold her loan to
a company based in Texas: Liftoff Loan Servicing. Though Liftoff
was presented as a different entity, Marcy noticed certain
information remained the same. Liftoff also seemed to be poorly
run. Marcy tried to get a copy of her home appraisal from
Liftoff-- as she did from New Centurion. Neither company knew
what had become of it. And Liftoff repeatedly lost payments.
Marcy put post office searches on them and stopped checks.
Eventually, a Liftoff secretary found the checks on her desk. But
by that time late charges had been tacked on. Which stuck like
glue and couldn't be resolved. Maybe because Marcy talked with
a different person each time she called. When Winter came and
heating bills loomed, Marcy called Liftoff and asked if she could
make monthly mortgage payments in two partial payments. A phone
rep said sure. But the check went uncashed. When Marcy inquired,
another person told her Liftoff did not accept partial payments.
Wanting to get her payments straightened out and to have better
records, Marcy authorized Liftoff to take the mortgage payments
directly out of her bank account. They did so immediately. Her
bank account shows the withdrawal. Yet Liftoff claimed to have no
record of the payment. After going round and round with Liftoff
and with loan charges growing ever larger, Marcy and her husband
decided it was time for a lawyer. With little money, they
couldn't afford high priced legal spread or second opinions.
Their attorney advised them to escape Liftoff by filing for
bankruptcy. Marcy and her husband hoped to keep the house
out of the proceedings, but since they refinanced to consolidate
debt were unable to do so. And refinancing again was impossible
because their home was already mortgaged for more than it
Marcy and her husband went bankrupt. They got a foreclosure
notice 5 days before Christmas, 2002. They received bankruptcy
release from the bank which now owns Marcy's house. This bank is
a subsidiary of a much larger banking entity, one which until
early 2001, held controlling interest in New Centurion. The
convoluted relationship between this larger entity and New
Centurion has been covered extensively in Inner City Press,
a publication which focuses on predatory lending practices in
inner city neighborhoods. And in the late 90's the subsidiary
bank and its parent company, were the subject of an action filed
by Minnesota Attorney General Mike Hatch. For selling customer
financial information to a telemarketing firm. The lenders
received not only a fee for the info, but a 22 percent cut of
net revenue sales.
In Pennsylvania in 2002, the same subsidiary reached an agreement
to cover $1 million in loans to 164 homeowners who, in the late
90's, had been ripped off by contractors exploiting the U.S.
Department of Housing and Urban Development (HUD) Title I home
repair program. The program insures home improvement loans made
by lenders to homeowners with poor credit. Contractors working
both Pennsylvania and Ohio, hustled homeowners into getting the
HUD backed loans, which were financed by a now bankrupt Texas
lender. The contractors wrecked rather than repaired, or skipped
out without completing work. Leaving many homeowners in serious
debt, with liens on property worth less than before the
"remodeling". The bank which repossessed Marcy's house was not
the lender in this case-- but the trustee for the securities
backed by the Title I loans financed by the bankrupt Texas
lender. Which had been the largest Title I lender in the nation.
Though in existence for decades, HUD's Title I home repair
program took off in the 90's like a bat out of hell, when
payments on subprime, home repair loans began being bundled into
securities which were sold largely to pension and mutual funds.
No doubt Marcy's subprime re-fi made its way into a bundle of
securities. Maybe several bundles since her loan moved from
company to company. One wonders if it was ever tagged non
performing. If so, it would have been a misnomer: Marcy's
incredible bouncing home loan could hardly be called a slacker.
It re-performed on assorted badly kept books, generated all sorts
of fees and was profitable to many. Though ultimately not to
Marcy and her family. And the U.S. taxpayer. Subprime mortgages
are typically insured by the Federal Housing Administration
(FHA). Which means that in case of default, the government
steps in and pays off-- even if the loan was based on an
But on the positive side, another home is free to enter the
hungry housing market. Maybe it won't sell for 88, but dubious
appraisals have definitely goosed it past the original 50. An
agent handling foreclosed HUD homes (FHA is part of the HUD
family) at a nearby branch of a national realtor is believed to
be marketing it. Though this seems shrouded in the same kind of
confusion that characterized the mortgage servicing. But after
Marcy and her family got the sheriff's notice to quit, this agent
asked Marcy if she'd want to earn a little money by "broom
cleaning" the house. Presumably in preparation for showing. All
Marcy could say was "You've got to be nuts". By now Marcy knows
nuts. Just recently, Liftoff Loan Servicing sent Marcy a letter
informing her they were adding $1000 dollars onto her loan for
property insurance. On a home she doesn't own. And which Liftoff
supposedly, doesn't own either.
Marcy and her husband made bad moves. They turned a blind eye
to dishonesty in the appraisal launched by broker Fred Dormutt.
Possibly they refinanced previously with similar disregard. But
they were not white collar criminals driven by gross Enronitus,
but a lower middle class family trying to keep their heads above
water. Plus, the prevalent real estate message is that property
values will always appreciate and catch up to appraisals. Till
then, why not use credit based on temporarily imaginary value?
Should Marcy and her husband been tougher and more wary?
Absolutely. But perhaps they didn't realize the housing industry
in this country now runs on caveat emptor. Plus Marcy did many
things right. She kept good records of payments and of who said
what and when. But dealing with financial institutions in far
away states isn't easy. Especially when obfuscation seems the
name of the game. Also factor in that people like Marcy can't
afford much legal recourse and are disinclined to seek, and are
sometimes ineligible for, poverty based legal services. However,
one thing people like Marcy do is hit the Internet.
Marcy's story is not unique; just one account from a country wide
epidemic. Regional newsmedia tells the same tale again and again.
Plus, since QT started covering real estate fraud, I've heard
from a number of people other than Marcy who believe they were
pushed into default via suspect mortgage servicing transactions.
I've also checked out the websites which serve as a forum for
people with the same kind of stories. Sure, some of the stories
are bogus. Some people just resent having to pay debts. There
are bankruptcy chasers trolling for class action suits. But the
overall pattern is too large and specific to be ignored.
A pattern incidentally, which aside from industry differences,
is reminiscent of various classic bunco scams which rely on
tangled transactions, long distance obfuscation, legal
inconsistency and consumers with little access to recourse.
A homeowner on the edge gets a refi pitch. Sometimes via
a mortgage broker, sometimes from a direct lender. After an
inflated assessment and a few payments (the number is typically
two) the initial out of state company sells the sub prime loan
to another company in another state. At times both companies
appear to be linked. Sometimes loans bounce through
interconnected company after company. Payments get lost, fees
are tacked on and records become totally confused. Hidden costs
suddenly appear. Phone inquiries are rarely answered by the
same person and produce contradictory and downright damaging
instructions. The financially strapped homeowner begins to feel
caught in an inevitable, downward spiral of ballooning debt.
Another refi is impossible. Bankruptcy and/or default seem the
only way out.
Essentially, the homeowner in these cases has been steered into
a form of mortgage flipping: one which takes place in the
mortgage servicing process and is sometimes called "equity
stripping". Not all flips are illegal. In your simplest form of
mortgage flipping, the flip occurs close to the initial point of
sale. In fraudulent instances, buyers are frequently fakes:
fronts for crooked developers, mortgage brokers and yes
Virginia-- even lenders. These "straw buyers" walk away with
a chunk of money and no hard feelings. But with stripping, the
homeowner participates in a long drawn out process: they may
cheat a little at first, via signing on to inflated appraisals or
proof of income, yet they hope to ride out the bumps and remain
homeowners. Instead, they get wrung out and tossed aside. Their
"ownership" has been little more than a mask under which
affiliated financial entities work a complex system. A system
which reduces the borrower to something disturbingly akin to
a serf. Enmeshed in a transaction which smacks of usuary.
Subprime lending has become highly profitable. Increasing
tremendously as lending practice over the past few decades.
The affordable housing crisis has grown apace. The increase in
subprime borrowing has been partly driven by social shifts, such
as single parent households and an attempt to address inequities
in home lending. But new inequities have arisen. Some as result
of abuse and some via unforeseen consequence. Inflating
appraisals and encouraging borrowers to fraudulently qualify for
loans, not only drives people deeper into debt but leads them to
develop a stake in fraud. And when subprime mortgage holders
default, taxpayers frequently pick up the tab. The more
disposable income is taxed, the less money people have to spend
on homes. Meanwhile, inflated appraisals and a government
supported housing market pushes home prices higher. Making
subprime borrowing more necessary to more people.
Some of the financial practices which facilitate abuse in
subprime lending are not illegal. Or are not so uniformly, from
state to state. Which may be one reason why across state line
transactions are so popular. International mortgage servicing is
the wave of the future. If Marcy in Wisconsin had such a rough
time with New Centurion and Liftoff Mortgage when they were based
in California and Texas, imagine the potential should their
servicing operations be shifted to say, India. As many subprime
providers are now in the process of doing.
The financial institutions that serviced Marcy's mortgage,
and by and large, the ones excoriated by so many disillusioned
homeowners on so many websites, are not store front operations,
but prominent players in the subprime market. Though some have
predatory reps, many are also connected to, or subsidiaries of,
massive banking conglomerates. As was the one that sent Marcy,
in the middle of a Wisconsin Winter, hurrying to sign papers at
a truck stop 200 miles from her hometown. So that she could
"get the right financing".
Carola Von Hoffmannstahl-Solomonoff
Next up-- On The QT Special Features: Truckstop Lenders &
Waterfront HUD Hauls, Part Two. New Jersey Gold Coast
Developers: Unlike Marcy, they know how to play the game. Plus
an alternate reality vision of HUDless revitalization and a cross
country roundup of some recent killer diller real estate frauds.
A few million here, a few billion there-- pretty soon we'll be
talking real taxpayer money!
*Subprime loans are most typically given people with weak credit
histories. Though debt problems or delinquency can be involved,
it can also be a matter of an insufficient income in relation to
the size of the loan, or no home ownership history. Subprime
loans, as opposed to prime loans, mean higher interest rates and
extra fees for the borrower. Mortgages, home equity loans and
debt consolidation are common applications of subprime lending.