Borrowed Time

In 2005, William Smith bought his Santa Fe home for approximately $305,000. He found a national lender willing to contribute $288,000 as an adjustable-rate mortgage. Fast-forward five years, “and of course our house is worth much less than that, and we’re way underwater,” he tells SFR.

(Smith’s name has been changed at his request because he is currently in foreclosure litigation, and didn’t feel comfortable discussing his situation otherwise.)

“The way real estate prices had been going up, I expected that they would keep going up,” he says simply. “I accept my responsibility and culpability.”

Smith has plenty of company. This June, banks foreclosed on one in every 384 housing units in Santa Fe County, according to the online foreclosure marketplace

.

But a recent court ruling, and a subsequent appeal, could significantly change how New Mexico courts view foreclosure cases—and whether homeowners like “William Smith” have any recourse against predatory lenders.

In 2004, before the national mortgage meltdown, New Mexico enacted the Home Loan Protection Act, forbidding predatory loan practices such as issuing a loan without proof of income or offering ones with “exotic” terms, such as interest-only or balloon payments.

The Act’s purpose was to protect homeowners from getting in over their heads, according to Angelica Anaya Allen, the chief litigator at United South Broadway, an Albuquerque community development corporation that offers pro bono legal services in foreclosure cases.

But last September, the 1st Judicial District Court ruled that a New York bank was exempt from the Act’s requirements—despite what appeared to be a classic case of predatory lending, with an 11 percent loan that required no proof of income.

The defendants, Mary and Joseph Romero, lost their house.

The case is now set to go before the New Mexico Court of Appeals. On July 20, several local organizations filed an

amicus

(“supporting”) brief on behalf of the defendants.

Fred Rowe, president of the Santa Fe Neighborhood Law Center and counsel for the group supporting the Romeros, says the case is an important test for how the Home Loan Protection Act applies to an expanding mass of foreclosure suits clogging New Mexico’s district courts.

Allen’s organization also has signed on to the case because the Act designates certain lending practices that are unfair and “should be prohibited,” she says.“New Mexico homeowners should be protected from those practices—no matter who it is that’s making the loan.”

In Smith’s case, an interest rate that started at 8.99 percent, he says, began increasing by whole percentage points after the first few years.

“Our attorney figured out that after seven years, if they had taken every advance that was possible, we could have ended up owing $30,000 a month!” Smith says. “How [could] they ever expect anybody to pay that kind of monthly fee? It’s crazy.”

Lidia Garza-Morales, a Santa Fe lawyer who works on foreclosure cases, says loans structured like Smith’s are “a guaranteed foreclosure.” At $30,000 a month, he could have paid off the entire house in less than a year—if, of course, he’d been able to pay that much.

“A lot of people were just happy to get a mortgage and somehow didn’t understand what the potential was,” Garza-Morales says. “The minute they signed that note, they were going to go into foreclosure eventually.”

The Home Loan Protection Act specifically prohibits certain types of adjustable-rate mortgages with the express purpose of protecting borrowers like Smith. But it’s of no protection if it doesn’t apply to national lenders.

Allen says she’s seen “very, very few” foreclosure cases involving state-chartered banks; the bulk of them involve national banks and lending companies.

Mike Loftin, the director of the affordable housing nonprofit Homewise, offers a similar observation.

Loftin says underwater homebuyers often come to Homewise for help refinancing an unaffordable mortgage loan—and that most of the predatory lending he’s seen involves bigger national lenders.

“Banks like Los Alamos National Bank—local, regular banks—didn’t get involved in a lot of this crap,” Loftin tells SFR. “Stakes are higher to them; they’re a community institution and they’re not going anywhere—whereas these mortgage brokers don’t have roots in the community.”

Homewise, along with several other local and state institutions—Somos Un Pueblo Unido, the Santa Fe Neighborhood Network, the Hispanic Bar Association, the Santa Fe Area Home Builders Association and the New Mexico Public Interest Research Group—also signed onto Rowe’s amicus brief in support of applying the Home Loan Protection Act to national and local lenders alike.

“We’ve always had a problem with subprime lending,” Loftin says. “Our approach has always been to provide a better alternative, but it’s also important that we try to put a stop to those practices.”

Rowe says the appeal process could take months. In the meantime, though, how New Mexico deals with its foreclosures will also depend on a more streamlined litigation system—and on the borrowers themselves.

Last July, New Mexico’s 1st Judicial District Court began a program aimed at resolving foreclosure suits out of court. The program uses “settlement conferences”—like mediation, but with lawyers trained in foreclosure litigation instead of mediators.

Although mortgage lenders are required to inform homeowners of this option, relatively few take advantage of it, Celia Ludi, the court constituent services director, tells SFR. Out of hundreds of foreclosure cases before the courts, only 99 borrowers took advantage of the settlement conference option in its first year.

Whether it’s a settlement conference, a lawyer or simply a call to the lender, Garza-Morales says, the most important thing a borrower can do is take action.

“The longer one waits, the worse it gets,” she says.

But Barry Hunnicutt, a Santa Fe real estate appraiser who is in the process of foreclosing on one of his properties, says contacting Wachovia, his lender, didn’t work.

“They wouldn’t negotiate [the loan],” Hunnicutt says. “I said, ‘What can I do?’ They said, ‘If you can’t pay your payments, there’s nothing we can do.’ They just want their money.”

Smith’s case, also with Wachovia, is even more complicated: His loan changed hands five times—at least once without notifying him, he says—and paperwork seems to disappear with astonishing regularity.

“The bank’s attorneys keep asking for all our financials,” Smith tells SFR. “Every three months we have to provide them with all our stuff; it’s a considerable amount of work,” he says. Then, three months later, they’ll ask for the exact same thing again.

Whether Wachovia will ever have to answer for that rests, according to Rowe, with the legal opinion of the New Mexico Court of Appeals.

Santa Fe Reporter