PART ONE: Mortgage scams leave millions in foreclosure, not always homeowners' fault
Mail carriers probably don't flinch anymore when they see a foreclosure notice. That's because they're delivering so many of them. But before you judge your neighbors for what may appear like their own mistakes, realize many people facing foreclosure are not at fault.
"We have the federal reserve and the banking industry and people who have been doing this all their lives who can't understand these products. So the idea that the average first time home buyer should be able to figure this out is not realistic," explains Judy Fox at Notre Dame Legal Aid.
Fox explains that subprime mortgages are good in theory. They offer loans at a higher rate to people who otherwise may not be able to afford a house. But greed took over and for a nicer profit, industry insiders scammed people into buying homes they knew the homeowner wouldn't be able to afford.
"I do get frustrated with people who say, 'Well, they signed it. They should have known.' I challenge any of those people to look through the papers and figure out what many of them mean," Fox says.
Fox gave that same challenge to her third year law students at Notre Dame.
"They're just designed in a way that's deliberately trying to confuse people," says Elizabeth Callahin. "I can't imagine how anyone could be able to decipher some of the terms in there. I think as a general rule it would be almost impossible to figure out."
"I thought we'd at least be able to figure out, okay, this is how much the mortgage is for, this is how much you're going to pay every month, and this is when you're going to finally have your house paid off. And that was really, really difficult," chimes in Jacob Vos. "From the original paperwork you couldn't tell how big of a check they were writing every month."
Fox makes the point that even with a legal background, loans are complicated to read and understand, especially these subprime loans. So many people signing the mortgage didn't realize what they meant. But they learned quickly once the foreclosure noticed arrived. At the end of last year, about a third of all subprime mortgages with adjustable rates in Indiana and Michigan ended in foreclosure.
Imagine this scenario. It's a typical one. You hire a realtor or a broker to help you buy a home, trusting that he or she is working in your best interest. You can afford your payments for about a year or two, and suddenly the payments go up hundreds of dollars a month. Well, nobody even told you your mortgage would be going up that much. Or, you were told it would be easy to refinance. Well, you can't afford the payments anymore and when you go to contact your realtor, he or she is nowhere to be found.
"They lied to us from the very beginning."
That scenario happened to Raymond and Sharon Steadman from Goshen.
"I went to an attorney and said, 'What am I supposed to do?' And he said, 'You just got scammed,'"Raymond Steadman explains.
The Steadmans say their broker never explain to them the mortgage would go up more than $1,000 a month over its course, a course cut short by the f-word: foreclosure.
"There are so many little things in the papers...the fine print they call it...they just go so fast at closing that you don't really know what you're signing," Raymond explains.
"What a broker can do...they can misuse their position and as a broker get someone into a house that they shouldn't be in," explains Mark Mahon from the FBI. "Eighty-percent of the fraud committed, mortgage fraud committed, is actually fraud from profit. Those types where you have industry insiders who are manipulating people who could be considered victims."
The FBI estimates $4-6 billion is lost every year because of mortgage fraud.
"The FBI is interested in investigating and hopefully bringing to prosecution with the US Attorney's Office those people who are out to make a profit off of mortgage fraud," Mahon says.
Abel Garcia shows us another kind of mortgage fraud. Garcia is facing foreclosure because he says the realtor lied on the loan application.
In August 2006 when he bought the home he says he made about $2,000 a month. But the loan application shows a salary of $3,100. So, the Garcias are in a home they simply can not afford, but the realtor and broker made off with a better commission.
"It's really sad," Garcia says. "It's really sad that I can't even explain."
Again, here's Judy Fox from Notre Dame Legal Aid.
"They knew that the people taking these mortgages out had mortgage payments that were more than half their income. Anybody with half a brain knows that's not an affordable mortgage and those are going to go bad, Fox says. "Oh, greed was the whole...the whole problem."
PART TWO: IS MORTGAGE FRAUD LEGAL?
Lending practices may have been shady, but they were for the most part perfectly legal. So why didn't lawmakers do anything to stop it?
"They don't understand what's going on," Fox says. "I know they're embarrassed because I've talked to some of them."
Well, about a month ago we set out to ask our local elected officials why regulations were so loose in the past and what's being done now in Washington. Congressman Joe Donnelly was the only one to grant us the interview.
"Congress understands this. I work on this on almost a daily basis."
Congressman Joe Donnelly says lawmakers are working to enforce the regulations they already passed years ago. He says Wall Street's appetite for risky mortgages left lenders blind to standards and now Congress has the duty of shedding some light again.
"The regulators are almost like referees. They're not limiting free enterprise. They're just being made sure the rules are followed," he says. "What I've been doing is working on the Financial Services Committee since I started to try to put lending standards in place that make sense so that families can get a house that's affordable to them, so that they don't get stuck in a mortgage that's over their head or is too difficult for them to deal with."
Years ago, congress passed legislation and told the Federal Reserve it can regulate and stop irresponsible mortgages. But the chairman at the time, Alan Greenspan, was against regulating and did not use that authority. Current Chairman Ben Bernanke has a different approach and recently we are seeing the housing market more closely watched. But Barney Frank, chairman of the House Financial Services Committee, says if Greenspan had done ten years ago what Bernanke did this past year, we would have much less of a problem.
Now, the laws are changing daily. Starting last year, regulators began cracking down on dirty practices. We'll see new regulation going into effect this fall, which basically gives incentive for realtors and brokers to work in the homeowners' best interest...not their own.
As for our other elected officials, Senator Richard Lugar's office flat out said the Senator did not have five minutes to talk with us on the phone. We had an interview with Congressman Fred Upton set up last week. He canceled that morning and has yet to reschedule. And, we're still waiting to hear a final answer back from Senator Evan Bayh's office.
Fox says lawmakers aren't talking publically because they missed the ball on regulating the housing market.
"There was some illegal activity but for the most part, a lot of it was legal. We didn't regulate the market and we should have," Fox says. "Why? Because if I know I'm going to be responsible for it, I'm going to pay attention to who I'm buying loans from. And that's the only way you're going to solve the problem and we still don't have that."
Fox and other consumer advocates tried explaining that to lawmakers years ago.
"We started trying to lobby. Trying to talk to Congressmen and Senators and say, there's a huge crisis looming," Fox says. "And they all said we were crazy. This is one time I wish I'd been wrong."
PART THREE: The foreclosure problem is everyone's problem
You may be thinking by now that you have nothing to do with mortgage fraud. But you do. Foreclosure affects everybody.
If a home in your neighborhood is in foreclosure, it affects the value of your house. The city or town you live in is paying out taxpayer dollars instead of collecting property taxes. The economy as a whole suffers, and as a result, people are out of jobs and then THEY lose their homes. It's a vicious cycle.
"We never thought it would get this bad."
Dolores Divens has lived in the same house for the past forty years but is now forced to move. A few years ago, she and her husband took out a loan because the house needed major improvements. Well, Divens is disabled and her husband has been hard pressed for work so they can no longer afford the loan.
"If there is any work he goes out and does it which is hard. He comes home holding his back all bent over. It's really hard but knows we need the money," Divens says. "If there is any work he does it."
Another group of people affected is renters. Many people who always paid their rent on time and in full are learning their landlords weren't paying the mortgage.
"We didn't appreciate the dishonestly," says Sidney Hunt from South Bend. "I assume she just pocketed it. Obviously she didn't do what she was supposed to do with it because we wouldn't have gotten the letters. No notice. All of a sudden letters that the Sheriff is going to seize the house on a certain date to auction it off to the highest bidder. That's not fair."
We went to one of those auctions, which are becoming busier and busier.
"You get overwhelmed. There's just so many of them," says Sheila Hall from the St. Joseph County Sheriff Department's Civil Division.
"There's a lot of them out there that got stung on a lot of these mortgages," Lt. Andy Pletcher chimes in. "And then there's a lot of them that didn't. And then there's people losing their jobs."
Last year in St. Joseph County more than 2,100 homes foreclosed. That's about 1,000 more houses than just five years ago.
"We're not at the bottom yet," says Judy Fox from Notre Dame Legal Aid.
"Their home foreclosure does hurt you," Fox says. "It hurts you because it hurts your neighborhood. It hurts you because it's one more loss for the bank and the more banks that fail the more the economy is going to be brought down. So it is your problem. It's everybody's problem."