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subprime mortgages
BOSTON — Upstairs at Victory Chapel Church — a
cinderblock bunker converted from a long-ago Ford dealership — the pews
are reserved for praising heaven.
But downstairs, in a basement rental hall, a pair of women preached of
worldly wonders.
At 11 a.m. on alternating Saturdays, they set out rows of folding chairs
and spread tables with urns of coffee and boxes of Dunkin' Donuts. And
they offered testimony to the bounty of real estate, encouraging their
growing flock to buy the wood-frame walk-ups and rowhouses surrounding
this workaday stretch of Columbia Road, just down from the mo Car Wash.
The key was trust, they told the faithful, as the voices of the
practicing choir rang through the building.
Still, Valerie Hayes was a little skeptical.
"I really was thinking it would be at least a year before I'd get a
mortgage," says Hayes, an executive secretary and mother of two. She was
wary of borrowing because she was saddled with her own student loans.
But "on Saturday I went to the seminar," she says. By Sunday, she was
preapproved to buy.
Soon after, Hayes did buy. The problem, prosecutors say, is that the
women put Hayes and others into homes they couldn't possible afford.
They did so by filling their loan applications with details of jobs,
paychecks and bank accounts that were all so much fiction.
What happened in this church basement was no fluke; it happened
elsewhere, too.
Much has been made of the very questionable lending that accompanied the
rapid growth of sub prime mortgages, a phenomenon that made homeowners
of so many people. But less attention has been paid to the gimmickry and
manipulation that delivered the loans an industry craved.
Some say this was nothing short of fraud. Those accused reject the
charges. The case also raises tough questions of whether borrowers, too,
should bear some responsibility.
But the bottom line is beyond dispute. Valerie Hayes can tell you about
that. Just don't go looking for her at the home she bought, thanks to
the women at Victory Chapel Church.
It's owned by the bank now, and there's a real estate agent's lockbox on
the door.
'Liar's loans'
Over the past decade, the mortgage industry has turned itself into a
very big tent.
People who might have had trouble borrowing found it much easier to get
a loan. Lenders devised new types of loans and eased standards to bring
buyers into the market.
As a result, homeownership reached record levels. But as interest rates
rise and the market cools, it becomes clear many people were put into
punishing loans they couldn't afford.
That is particularly evident in the enormous growth of what the industry
politely calls "stated income" loans — also known as "liar's loans."
Stated loans — whose borrowers list income and assets without having to
prove anything — were meant for solidly self-employed buyers. Then they
"morphed into a huge monster," says Connie Wilson of Interethnic, a
maker of mortgage fraud detection software. "Now we have stated income
programs for everyone."
The loans have become a huge piece of the sub prime market. Last year,
nearly half of sub primes required little or no documentation of income,
a share that has nearly tripled since the start of 2000, according to
First American Loan Performance.
But in its love of these quickly processed loans, the industry
overlooked the pitfalls.
A study by the Mortgage Asset Research Institute Inc. of 100 stated loan
applications last year found almost 60% exaggerated incomes by at least
half. A study by Base Point Analytics found that 70% of mortgage
defaults were linked to "a significant misrepresentation on the original
loan application."
Mortgage fraud is most visible in the spectacular cases that draw
prosecutorial muscle, involving fake buyers, property flipping, vast
amounts of money. But that overlooks smaller-scale foul play now costing
many sub prime borrowers their homes, experts say.
Often it's not considered fraud. It's pushing the envelope. It's a
dollop of distortion topped with a measure of creative exaggeration.
It's doing whatever it takes.
"There's a huge amount of broker fraud out there," says Kerstin Aretha
of the Fair Housing Law Project in San Jose, Cal., which represents
low-income homeowners stuck in such loans. "When you look at the
applications of many of these borrowers, I see it reported that they
make $10,000 or $12,000 a month, sometimes $20,000 a month. They always
have $100,000 in personal assets ... You can see that these things are
created by the broker."
MORTGAGE WOES: Banker blames brokers
Of course, most real estate agents and mortgage brokers are honest.
But there have been too many in the last few years "who stretch the
truth ... that make deals happen that really shouldn't happen," says Jim
Croft, founder of the Mortgage Asset Research Institute.
"And they always have the fallback that they're not dishonest," he says.
"They're just helping Jill and Joe Six-pack get into the home — and
realize the American dream."
'Lets Make History'
Frances Darden dreamed of buying a house. And not just any house.
It would be in Boston, because this was home now. But it would look and
feel like her grandparents' place in the South Carolina of her
childhood, because that's what home meant.
It would have a backyard for barbecues and a front porch for
conversation. Its French doors would usher visitors from living room to
dining room. It would not be a grand place, mind you, but thinking about
it made Darden feel just grand.
Still, it was lot to imagine for a hair stylist on disability, reliant
on a subsidized housing voucher and supporting two teenagers. Banks told
Darden to scale back her dreams, offering to lend, but not enough to buy
in her own neighborhood.
Then, in September 2004, she spotted an ad in the weekly Banner.
"Want to Buy a Home? Credit Less Than Perfect?" beckoned one of what
would become a series of ads by Champagne & Associates, a real estate
agency in her neighborhood of Dorchester. The slogan above the agency's
name made Darden optimistic.
"Let's Make History," it said.
Darden went to Champagne's free seminar with her friend, Annie Neal. It
was held in the agent's office, facing a traffic-filled avenue, between
a storefront daycare center and Linda's African Braiding & Clothing.
Agents had pushed the desks back to the green stucco to make room for an
audience. The prospective buyers met two women who vowed to help them.
The first was Champagne's owner, Roberta Robinson, a former mortgage
broker who'd started her own real estate shop.
"She had an answer for every question," Darden says.
The second was Rachel Noyes, a bartender-turned-mortgage broker who
brought her toddler to some seminars, and promised to unlock the secrets
of buying real estate.
"I really felt like I was helping people get into homes," Noyes said in
a recent telephone interview. "The one question I always asked, to drill
into your mind, is: How much can you afford?"
But those who attended the seminars — describing the experience in
interviews and court papers — don't remember it that way.
"As long as you're honest with me," Valerie Hayes recalls Noyes saying,
"I guarantee you I can you get you into a loan."
At session's end, organizers asked for Social Security numbers to run
credit checks.
"We're not going to be approved to buy a home in Boston and I don't want
to go out to Lowell," Darden recalls thinking.
But a couple of days later her phone rang. It was Robinson — with good
news.
Darden had been preapproved for a loan. Up to $360,000!
'How is that possible?'
It only took a few weeks for Frances Darden to find her dream house — a
two-family set on a corner of Harvard Street with pale yellow siding, a
small front porch and another on the back. But could she afford it?
Darden says Roberta Robinson calmly reassured her.
"I have always been about educating the consumer regarding real estate
since I hit the scene," Robinson wrote of herself in an advertising
directory. "I feel the first step in homeownership is working with an
informed client."
Robinson did not return calls and her attorney declined to comment.
When another bidder pulled out of a deal for the house, Darden says
Robinson called with more good news.
"She said, 'You have some good credit, girl, because you got approved
for two houses,"' Darden recalls.
"How is that possible?" wondered Darden, who says she first told the
agents she could afford only $1,500 to $2,000 a month in payments.
Renters, she was told, would help her carry the load of her own home,
and the costs would be further offset by a three-family rental property.
Soon, mortgage applications — almost entirely blank — arrived in the
mail. Darden signed and returned them. In November, Darden closed on the
first house. In December, she closed on a second.
She'd been preapproved for $360,000. Now she was borrowing $894,000.
It would cost her $7,194 a month.
It wasn't until seven months later, though, after she struggled to find
tenants and maintain the buildings, that Darden began to wonder just
what had happened. It began to make sense only when she studied the
finished paperwork.
When she bought, Darden was receiving $1,800 a month in disability
payments — as she recovered from a collapsed lung — sometimes
supplemented by child support of $150 a week.
But the mortgage application described a woman she did not recognize: an
administration manager for a medical supply company, earning $114,000 a
year.
Meanwhile, the real Frances Darden was quickly falling behind.
In June 2005, Darden says she went to the Champagne office to demand
help in refinancing her loans. By now, though, the effort to recruit
buyers had outgrown the space on Blue Hill Avenue and moved to the
church. Some of the sessions were drawing 40 or 50 people.
Robinson tried to help her sell the second home. But Darden was going
through a divorce, tying up the home's ownership. She was and falling
farther behind.
Now it had been a year since she'd become a homeowner. Long enough for
the lender to lay claim to the investment property and begin
foreclosure.
'I got robbed'
One of the most notable things about Frances Darden's story is how much
it echoes the others.
Valerie Hayes says she knew something was very wrong when she went to
close on the $440,000 loan for her house, a two-family in East Boston.
She'd agreed to $2,300 payments because of expected rental income. But
the documents listed payments at $3,300 a month.
"I see the real mortgages and it's apparent to me I got robbed," Hayes
says, "but I'm thinking I'm going to make this work."
Why didn't she walk out? Because she'd already given up her old
apartment and had a tenant waiting to move in. Within months, though,
maintaining the building depleted savings already strained by the
mortgage payments. That's when she noticed the reference to a second job
— one she never had — earning a fictional $1,846 a month working for
Champagne.
Late last year, Hayes moved out and the lender began foreclosure.
Others are still trying to hold on.
There's Mandela Louis, a nursing assistant, who bought on Edwin Street.
Her loan application said she had a second job working for a company,
Hart Professional Cleaning, that does not appear to exist.
And Jennifer Stone, a medical assistant who bought a $489,000 home with
her partner, a special police officer.
"They said we had accounts we didn't even have. They said we had $50,000
in the bank," Stone says. "I didn't even have $700 in my 401(k)."
Dorchester, a sprawling mostly black neighborhood where many families
get by on tight paychecks, has many homeowners who struggle. So when
Darden went to see a foreclosure prevention counselor at SAC, a
non-profit chartered by a number of Boston churches, it was hardly out
of the ordinary.
It looks like you make pretty good money, counselor Steve Bennett told
her, studying the mortgage paperwork. No, Darden insisted, that's not
me.
Bennett wondered. Then he heard the same story from a second homeowner.
And a third.
"This was a huge learning curve," says Robert Pollster, the agency's
executive director. "What the hell is going on here and how did this
happen?"
In August, Massachusetts' attorney general filed a civil lawsuit in
state Superior Court accusing Robinson, Noyes and their companies of
using "unfair and deceptive tactics to target and deceive low-income
consumers into committing to mortgages they could not qualify for or
afford."
The women pocketed thousands of dollars in commissions and fees for
putting together deals and loans bound to fail, the suit says.
Prosecutors have obtained court orders restricting the activities of the
women and their companies, both of which have closed. While the case
awaits trial, however, Robinson has resurrected her real estate business
in a nearby Boston neighborhood under a new name — Opulent Realty Inc.
Noyes, who moved to Florida, recently lost by default after she stopped
appearing in court to contest the charges. But damages have not been set
and she continues to deny any deception.
It was the real estate agents who "were pushing people into homes they
shouldn't have been," Noyes says. Borrowers, too, bear responsibility,
she says.
"With stated income loans ... because there's no documentation, you're
going by what the buyer is saying," Noyes said. "Who am I to say:
'You're a liar. You don't make that.' Should I have had better judgment?
I don't know."
The borrowers reject that argument outright. Darden rushes to her
bedroom and returns with a bag full of documents, pulling out a copy of
the mortgage application she signed. It is all but blank.
If they deserve blame, she and other buyers say, it's for being too
willing to believe and too naive to ask questions.
On a cool spring evening, Hayes walks from the modest but tidy
one-bedroom rental she shares with her college-age son and daughter,
three blocks up to the home she lost. It takes just a few minutes, but
confirms how far she has come.
If she gets another chance at ownership, she'll be wiser, Hayes says,
recalling that Saturday morning listening to a pitch in the church
basement.
Sub prime loans?
"I never knew they existed," she says, "until I got one."
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