Recipe for foreclosure: Fraudulent mortgages devastate home-loving West Virginians and fuel national subprime crisis
“This is an action arising out of a practice known as predatory lending, whereby a mortgage broker, out-of-county appraisers and a national lender act together to exploit unsophisticated consumers by persuading them to enter into high-interest mortgage loans that are not supported by the value of their homes.”
— from Hager v. Bank of America, in the United States District Court for the Southern District of West Virginia
Eight years ago, Charleston public interest attorneys Dan Hedges and Bren Pomponio started suing predatory mortgage lenders and brokers.
“These companies target elderly and low-income West Virginians and talk them into signing fraudulent mortgage loans they can’t afford,” Hedges said. Their homes are at stake.
“These are not sophisticated borrowers,” Pomponio said. Most found themselves up against the financial wall because of job loss, old age, medical bills or some other big expense, he said.
Their law firm, Mountain State Justice, has filed about 800 cases on behalf of thousands of West Virginians facing foreclosure. Their clients have contended with bogus appraisals, kickbacks to brokers, misrepresentations and outright lies, illegal fees and other fraudulent practices.
These cases connect West Virginia mortgage fraud with this year’s Wall Street mortgage foreclosure debacle.
Wall Street has staggered under a national explosion of subprime adjustable rate mortgage foreclosures. You can find the beginnings of that blast, Hedges said, in towns like Pineville, Madison, Clay and Charleston.
Recent figures suggest the ripple effects:
s One in four West Virginians (26 percent) with such mortgages were delinquent in payments in the second quarter of 2007, according to the National Delinquency Survey of the Mortgage Bankers Association.
s West Virginia has the second highest delinquency rate in the country for subprime adjustable rate mortgages, according to the MBA survey, second only to Mississippi.
s In the first quarter, West Virginia was third, with a 21 percent rate.
s One in eight West Virginians with subprime adjustable loans (13.5 percent) faced foreclosure, the MBA reported in September.
Since 2001, some of America’s biggest out-of-state financial institutions have foreclosed on 5,738 West Virginia homes. The list includes Wells Fargo, Citibank, Bank of America, Wachovia, Chase, Countrywide and others, Hedges and Pomponio say.
Mountain State Justice employees counted those foreclosures in all 55 county courthouses.
“The number has gone up every year,” Hedges said.
Those West Virginians took out loans through mortgage brokers in towns such as Glenville, but then their mortgages were sold to out-of-state companies, and sometimes re-sold until they reached national banks and Wall Street firms.
Hedges and Pomponio take only mortgage cases with clear evidence of fraud. Their success rate? “We’ve never lost a case,” Hedges said. “These cases are that egregious.”
He defines success as “getting the loans voided or substantially altered so people can stay in their homes.”
How does it happen?
Many of their clients are elderly or unfamiliar with finance, have limited education, are disabled or can’t read well. They are typically confronted with contracts 30 to 50 pages long, with riders that may reverse what the main contract says.
Many did not know they had signed subprime “exploding ARMs.” Those are adjustable rate mortgages (ARMs) that were immediately being sold out of state, Hedges said. They seldom knew their interest rate would stay constant for two or three years, then explode upward twice a year.
“If they did know, they’d been told they could automatically refinance, and that did not happen.”
Nowhere in the contract does it say how much they will have to pay back or how large their payments could be, once the interest starts rising, he said.
“It’s a recipe for foreclosure,” he said. Such a mortgage could saddle a person with a $250,000 payback for a $50,000 loan.
Predatory lenders often do not give borrowers an advance estimate and listing of terms, as required by federal law, Hedges said. Often, borrowers don’t see the agreement until they’re asked to sign it. “The brokers may tell them their agreement says something different than it does,” he said. “And these agreements are written in language a sophisticated person would have trouble understanding.”
Here’s a sample: Beginning with the first Change Date, my interest rate will be based on an index. The “Index” is the average of interbank offered rates for six-month U.S. dollar-dominated deposits in the London market (LIBOR) as published in the Wall Street Journal. The most recent index figure available as of the first business day of the month immediately preceding the month in which the Change Date occurs is called the “Current Index.”
“People trust the mortgage broker to explain it to them, which is a mistake,” Hedges said.
The broker may get a kickback called a “yield spread,” Hedges said. Here’s how that works: The lender tells the broker he can make the loan at, say, 8 percent. The broker convinces the borrower to accept 10 percent. Then the broker gets the extra money, and the borrower is stuck with a higher rate.
“The borrowers seldom know about the yield spread,” Hedges said. “That’s the problem.”
How do these loans end up in the possession of Citibank or Chase Manhattan?
“The whole thing starts when local brokers and little lenders approach people and say, ‘You need to refinance with us. We can get you a better deal,’” Hedges said. “And of course, it isn’t a better deal.
“We’ve had cases where the broker went door to door like an aluminum siding salesman,” he said. “But they mostly do it over the phone or by mail.” The usual pitch is: “Bad credit? Don’t worry.”
“The people they target tend to be trusting. They are typically led to believe they can deal with the local company for the life of the loan. They don’t realize the local broker is just doing legwork for an out-of-state company in return for a substantial commission.”
More than half of the Mountain State Justice cases involve appraisal fraud, Hedges said: the lender gets an appraisal that says the property is worth two to four times more than it is.
“It’s illegal in West Virginia and many other states to make a mortgage loan for more than the value of the property,” he said, “but many of these lenders have at their beck and call appraisers who are willing to value the property any way the lender requests.”
Perhaps 15 or 20 of the state’s 850 appraisers will do this, Hedges said. “The same appraisers keep cropping up again and again in our cases,” he said. “They supply the lender with a bogus appraisal that far exceeds the value of the home, to get the loan up high. We’ve seen it hundreds, probably thousands of times.”
The appraisal goes to the lender and broker. The borrower often never sees it, he said.
Predatory lenders often don’t exactly follow office procedure. “These loans are closed anywhere,” Hedges said. “Dairy Queens and Burger Kings and on the hoods of pickup trucks. Kinko’s. We had one closed on the Turnpike.
“Frequently, a notary shows up in people’s homes at night. And when people ask what’s in these documents, the notary says, ‘I don’t know. I was just told to get your signature. Here they are. Sign them if you want the loan.’
“And of course, the people believe what they’ve been told over the phone, and they go ahead and sign.”
The out-of-state lender “bundles” the new loan with others and sells it to a national bank or lending institution. Banks like Wells Fargo and Citibank use those bundles to guarantee other investment. Pieces of a loan made to an elderly woman in Mullens can end up all over the globe.
“In recent years, Wall Street firms have displayed an insatiable appetite for these kinds of loans,” said Kathleen Keest, lead attorney for the Center for Responsible Lending, based in Durham, N.C. They slice and dice them, mix them with mortgages from Iowa, Mississippi or wherever and use them to back various investments all over the globe, she said.
“It’s so pervasive, it’s hard to avoid supporting it,” Pomponio said. He and Hedges recently discovered that their own pension fund owns stock in at least one of the national banks they’re suing.
The Wall Street pipeline is drying up for now, under a wave of foreclosures, lawsuits and negative publicity. Mountain State Justice has sued about 30 national banks, Hedges said. Their legal argument: Accepting these loans is somewhat like receiving stolen goods. They knew or they should have known.
Big banks have their own written standards of ethical procedure and ways to know if loans are fraudulent, Pomponio said.
They often use “loan servicing organizations” to collect on the loans. “They try to hide the fact that they’re involved in this,” Hedges said.
‘A time bomb’
Nobody wants to defend predatory mortgage loans. Joe Ellison, CEO of the West Virginia Bankers Association, said his organization has considered a campaign to educate the public about predatory lending. The National Association of Realtors features “How to Avoid Predatory Lending” advice on their Web site.
The whole thing started with good intentions, said mortgage broker John Asseff, owner of Charleston’s Solutions One Mortgages. The federal government meant to increase homeownership by making subprime, adjustable-rate mortgages available to risky borrowers, he said. “Is it better to give a subprime loan to a consumer and give them the hope of owning a home? Or is it better to not give them a subprime loan and turn them away from the American dream?” he asked.
“There’s many people who believe it’s better to give somebody a chance at homeownership and give them an opportunity to pay for that home on a timely basis.”
But most people who take out subprime, adjustable-rate loans are not new homeowners, according to Center for Responsible Lending studies. Foreclosures on these loans exceed the number of new homeowners, CRL data show, so home ownership actually decreases.
“The number of foreclosures on these kinds of mortgages has risen every year in West Virginia,” Hedges said. “And it’s likely to escalate dramatically in the next few years.”
One in five Americans who took out a subprime ARM between 1998 and 2006 will lose their homes, CRL predicts. Millions of subprime, adjustable-rate mortgages were issued in 2005 and 2006. Their interest rates have started spiking. About 20 percent will default, CRL predicts.
It’s a time bomb, Hedges agrees.
In June, RealtyTrak, a nationwide online marketplace for foreclosed properties, reported 165,000 new foreclosure filings, more than twice as many as were reported in 2005.
Ironically, West Virginia law forbids adjustable rate loans, said Bob Lamont, general counsel for the state Division of Banking. But during the Reagan administration, Congress passed a law that pre-empts state law in this area.
“There’s a federal law, called The Alternative Mortgage Transaction Parity Act, and that’s Congress telling the states: ‘We don’t care what your law says,’” Lamont said.
By federal law, the state cannot regulate out-of-state lenders, national banks and their subsidiaries. So that means the state cannot regulate many of the very outfits that make these fraudulent loans.
As of mid-September, 575 lenders were registered to do business in West Virginia. Many are middle-men, companies who provide the loan through the broker, then sell it to a big national company.
They are just the lenders the state can regulate. The Division of Banking has no way to know how many others are writing mortgages in West Virginia, Lamont said. “Most of them don’t register with us,” he said. “They don’t have to.”
West Virginia-chartered banks are almost never involved in fraudulent mortgage cases, both he and Hedges said. Ironically, that makes West Virginians more vulnerable. “People are used to dealing with local bankers who do not routinely lie to them or set up situations where they cannot make payments.”
“The history of local banking in West Virginia has been the community bank that you can go in and talk with if you need a couple of extra weeks before payday,” Pomponio said. “The last thing most local banks want is a foreclosure. They live in the community.”
There are exceptions. In 1999, the First National Bank of Keystone collapsed, in part because it was buying huge lots of bundled loans to sell to national institutions. State officials could not regulate it or investigate its practices because it was nationally chartered and therefore exempt from state regulation.
The two sets of rules give unscrupulous lenders an unfair advantage over state banks, Hedges said. “State banks have lost substantial market share to these outfits,” he said.
‘If it sounds too good to be true ...’
Eight file cabinets in Mountain State Justice’s Charleston office are packed with mortgage documents. The two attorneys keep about 130 case files on their computers at any given time, Pomponio said. Some involve dozens of people.
“But we can’t begin to represent all the people who need help,” he said.
Few West Virginia lawyers will take these complex cases. Fayette countian Renee Waselchalk, for instance, said she approached 10 attorneys in Fayette and Raleigh counties on behalf of her mother before she found Mountain State Justice.
Nobody knows how many fraudulent mortgages there are out there. Unless a person takes legal action, Keest said, their problem remains invisible. And people often have trouble getting a lawyer, especially in rural areas. “These can be very complex, time-consuming, expensive cases, especially when you have to go up against lawyers from international banks,” Pomponio said.
As a public interest firm, they are funded to do that for low-income people, so they don’t have to charge them. Few states have such a firm, said Keest, of the Center for Responsible Lending.
Most attorneys don’t know this kind of mortgage law, said Charleston bankruptcy attorney Andy Nason. “And an attorney who doesn’t know how to do a case probably shouldn’t take it.”
“We could keep four to six more attorneys busy at this point,” Pomponio said.
Ultimately, the public has to become more alert to the dangers of predatory loans, Hedges said.
“If it sounds too good to be true, it probably is.”
To contact Kate Long, use e-mail or call 348-1798.