Second Mortgages Being Pursued
Hat tip to stormin for sending this along, from News10:
SAN DIEGO — Adding new uncertainty in the state’s ongoing mortgage crisis, a Texas company is aggressively pursuing hundreds of Californians to collect second-mortgage debt — on homes they’ve already lost through foreclosure.
Many of these former homeowners believed their mortgage debt had been erased after their houses were taken by banks and lending companies. But the Texas company, Heritage Pacific Financial, has aggressively pursued collections and filed lawsuits claiming those debts still linger.
For Ahmed Abdelfattah of San Jose, debt collectors started calling in 2009, saying he owed Heritage Pacific $135,000. He said he’d never heard of the company before.
“It’s been a nightmare,” Abdelfattah said. “It’s cost me money and time, and they ruined my credit until now.”
Oscar Trejo said his first encounter came a few days before he expected to exit bankruptcy and get a fresh financial start. That was in November 2010, he said. Heritage Pacific sent Trejo, who also lives in San Jose, a letter saying it had asked a bankruptcy judge not to discharge, or erase, its $88,800 claim against him.
Trejo invested in properties in Merced and later lost them all in foreclosures. But he hadn’t done business with Heritage Pacific. “I had never seen the company’s name,” he said.
Heritage Pacific was started by identical twin brothers, Chris and Ben Ganter, who once starred in a reality TV show, “PayDirt,” about investing in the Dallas-Fort Worth real estate market.
The company’s lawsuits often accuse defendants of misstating their incomes on loan applications. While many borrowers did overstate their incomes on applications, consumer attorneys say Heritage Pacific is targeting people who filled out their forms honestly or whose mortgage brokers pumped up their applications without their knowledge.
Critics of Heritage Pacific say the company’s central tactic is forcing settlements from people who can’t afford a drawn-out legal fight and who don’t know the details of California law. The company has sued people with second-mortgage debts of less than $150,000, despite a state law prohibiting lawsuits alleging fraud on mortgages below that amount.
Heritage Pacific’s collection methods now face legal challenges, including a class-action lawsuit in Santa Clara County Superior Court that contends that the company is carrying out an “insidious and illegal debt collection scheme.”
The company doesn’t make mortgage loans, but instead attempts to collect payments on loans originated by others. Heritage Pacific launched its effort in late 2008 when it began buying – at a steep discount – second-mortgage loans that borrowers had stopped paying. Many of the loans were secured by houses that already had been sold in foreclosure by first-mortgage lenders.
By demanding payments from more than 1,000 individuals in California, the lawsuit contends, Heritage Pacific has violated “the rights of those who have already suffered the emotional and financial distress that results from the loss of their foreclosed home.”
Heritage Pacific is nothing more than “people in Texas acting as vultures,” said Will Kennedy, a lawyer in the class-action suit.
In an answer to the lawsuit, Heritage Pacific says it’s not suing “innocent home-owners who, through no fault of their own, lost their homes.” Instead, the company says it targets defendantswho “made material misrepresentations to secure large loans upon which they soon stopped paying.”
Fraud claims “are the only ones we’re interested in pursuing,” Chris Ganter, the company’s chief executive and main owner, said in an interview.
But some former homeowners now threatened with legal action by Heritage Pacific dispute these claims. They told California Watch that the income they claimed on their mortgage applications was valid, and they stopped paying because they lost their jobs, their income plummeted and banks foreclosed on their houses. Others said they signed applications that had been prepared by brokers.
Amassing Second-Mortgage Notes
Heritage Pacific had no trouble finding plenty of so-called non-performing second mortgages for sale. During the recent real estate boom, an estimated 25 percent of house buyers took on a second mortgage rather than make a down payment, according to a 2007 Federal Reserve study.
A giant foreclosure wave swept hundreds of thousands of Californians from their homes. They often left behind second-mortgage loans that looked uncollectible and worthless.
While lenders can sell foreclosed properties and keep the proceeds, in California theycan’t pursue borrowers if the sale falls short of the amount owed. Foreclosure also takes away most of the legal tools for creditors to seek payments on second mortgages.
That’s where Heritage Pacific has stepped in.
Rather than shy away from seemingly worthless second-mortgage notes, Heritage Pacific spent millions of dollars to assemble an inventory of at least 40,000 second-mortgage notes, according to interviews with company executives and deposition testimony.
Fraud accusations against former homeowners became Heritage Pacific’s tactic for restoring value to its second-mortgage notes. California law gives a lender that can prove that a borrower fraudulently obtained a loan for more than $150,000 the right to sue. A creditor also may allege fraud to prevent a debt from being erased in bankruptcy.
Abdelfattah, a 52-year-old naturalized American who was born in Egypt, said it wasn’t fraud, but a steep drop in his income as a sales manager at a local Honda dealership, that caused him to fall behind on his monthly house payments of $5,000.
In 2008, the holder of his first mortgage foreclosed on the three-bedroom, 1,170-square-foot Santa Clara house that he had purchased in 2005 for $675,000.
But to his chagrin, Abdelfattah found that foreclosure didn’t end his house-related financial woes. As the summer of 2009 faded, he started getting collection calls from two or three individuals representing Heritage Pacific. They wanted him to pay a portion of the $135,000 balance they said he still owed on the second-mortgage loan he had used in his house purchase.
The callers were “really annoying,” Abdelfattah said. One was “really aggressive, cursing on the phone.” They accused him of never having lived in the house. They sent him a letter asking him to verify his income, and another titled, “Demand for Payment of Outstanding Debt.”
In May 2010, Heritage Pacific named Abdelfattah in a lawsuit that claimed that he had used fraud to obtain a second mortgage. But on March 19, a Santa Clara County Superior Court judge threw out the company’s claim against Abdelfattah because the alleged fraud had involved a loan for less than $150,000.
Abdelfattah, who wants to buy a house, was only somewhat relieved: “They are not able to sue me, but (Heritage Pacific’s claim) still affects my credit.” Abdelfattah’s countersuit alleging violations of debt-collection law by Heritage Pacific is scheduled for a jury trial in July.
Heritage Pacific declined to comment on the details of Abdelfattah’s or other individual cases, but said, “Any court rulings against Heritage Pacific Financial will be appealed to the California Court of Appeals as soon as it is possible to do so.”
Heritage Pacific can ignore the prohibition on pursuing fraud claims related to loans for less than $150,000 because it still can get default judgments and out-of-court settlements from some defendants, said Kennedy, the attorney in the civil action.
As a practical matter, he added, “the law only applies to people who are in a position to defend themselves.”