It’s a crisp September morning, and Gerald Valdez’ house looks as tranquil as the rest of his southwest Santa Fe neighborhood. A U-Haul van parked in front of his doorway is the only sign of the turmoil within.
Inside, it’s a scattered mess of boxes and half-full energy drinks. Valdez, a bulky, middle-aged man, has seven hours to pack up everything he owns and leave the house he’s lived in for more than two decades—a house he built with his own hands, and where he raised his six kids.
At one point, Valdez, deep-voiced and solemn, holds a picture of himself and his 2-year-old daughter standing and smiling in front of their then-new 3,000-square-foot adobe home. Now a grown woman in her 20s, she, her two brothers and her boyfriend help Valdez pack up. Commotion rises as they periodically yell at each other over the chores.
“There’s a lot of blood, sweat and tears that went into this house,” Valdez explains, tears welling in his eyes.
Two days ago, two sheriff’s deputies and two locksmiths knocked on his door with an eviction notice. From the back of his house, Valdez says he watched one of the locksmiths climb through his kitchen window and then let the others in through the front door.
Valdez’ house went into foreclosure in June 2008, and he spent the next two years trying to lower his mortgage payment. Each time, he got the run-around, he says: neither the bank nor even a federal program designed to help homeowners like him offered any help.
Now, it’s time to leave. The way Valdez tells it, one of the deputies apparently tried to comfort him by saying he went through a similar experience and that they “had a lot to talk about” over a cup of coffee. Flabbergasted, Valdez didn’t take him up on the offer.
“I feel like I just got ramrodded,” he says.
Last week, Wall Street investment bank JPMorgan Chase & Co. reported record quarterly profits of $5.3 billion. The bank’s CEO, Jamie Dimon, announced that the housing industry had finally “turned a corner.”
The story on the ground couldn’t be more different. New Mexico is on track to finish the year with at least 9,200 foreclosures—a near 5 percent increase from last year, according to foreclosure database RealtyTrac. Santa Fe County’s foreclosure rate is among the state’s highest, with 971 foreclosures as of September. And New Mexico isn’t alone: Between 2007 and 2011, 3.6 million homes across the country went into foreclosure. The Center for Responsible Lending estimates that another 3-5 million will follow suit the next few years.
And, even if the mortgage crisis that hit the country in 2007 and 2008 is finally fading, many homeowners now face a host of other problems. Many mortgages changed hands so many times that the related documentation is faulty or non-existent, confounding both homeowners and banks. In some cases, banks may be foreclosing without proper documentation, but people whose homes are already underwater seldom have the money to fight them in court. And even homeowner assistance programs bring little relief: Although nearly 900,000 people have taken advantage of President Barack Obama’s Home Affordable Modification Program—launched in 2009 with the ambitious goal of helping up to 4 million homeowners modify their mortgage payments—even more have been unable to meet the program’s requirements.
Some say homeowners now facing foreclosure should have realized they were biting off more than they could chew—but Valdez’ story isn’t about greed or stupidity. It has more to do with the convergence of several factors: a divorce, a layoff, a stalled economy and plain old bad luck.
Valdez’ troubles began in 2007, when he took out a $330,000 mortgage on the house he built. An expensive, messy divorce had ended with his ex-wife staying in the house for a few years before settlement terms allowed him to buy it back.
At the time, Valdez was working at the New Mexico Department of Transportation after coming off a stint as a project manager for the City of Santa Fe. But, in December of that same year, DOT ended his contract without offering him a permanent job. The recession hit, and Valdez took a job with Santa Fe Imaging for half the pay he was used to.
Along the way, Valdez had trouble balancing his $2,200 monthly mortgage bill with the needs of his kids and the monthly divorce payments to his ex-wife. In February 2008, no longer able to afford his mortgage, Valdez stopped paying it.
He tried repeatedly to modify his mortgage, but in the end, he was rejected.
His complaints about the process mirror many homeowners’: He says the mortgage company repeatedly lost the documentation he sent in, telling him to resend it each time.
Valdez’ sister-in-law Micha, a real estate agent who went through foreclosure on her own Santa Fe house last month, says situations like this are prompting middle-class homeowners to give up. After winning her house through a divorce settlement, Micha—like Valdez—says she was stonewalled by banks when she tried to modify her mortgage.
Earlier this year, Micha became a certified forensic loan auditor. She now has a dozen Santa Fe homeowners’ files on her work desk—each one, she says, representing a victim of fraudulent housing industry practices that contributed to the mortgage crisis. Foreclosed homeowners’ only recourse, she says, is the courts, and few of them can afford to pay a lawyer $250 an hour.
“The little guy doesn’t have any way to fight,” she tells SFR, “so he’s folding his cards, he’s getting thrown out of his home, and it’s just—no cry is being made. If a cry doesn’t get made nationally—state by state and nationally—what’s going to happen is the middle class is going to go down, and they’re going to go down in a big way.”
Most people have heard some version of how we got to this point. In the early and mid-2000s, the housing market bubbled to artificial and unsustainable levels as bankers sold millions of homes to low-income people who, often unknowingly, couldn’t afford them.
The transactions were fueled by the debt accumulated from people like Valdez. Houses, in particular, are expensive, and almost nobody can afford to buy them up front.
“In a capitalist economy like ours, everything turns on debt, on borrowed money,” Santa Fe lawyer Daniel Yohalem tells SFR. “We’ll lend you the money when you’re 25 or 30, and you’ll pay us the money back until you’re 60.”
Here’s how it works: Let’s say you want to buy a house. Unless you have enough money to pay cash, you’ll have to get a loan from a bank—a mortgage. The reasoning behind a mortgage is simple: The bank gives you the money you need to buy the house. In return, you agree to pay the bank back over a certain time period (usually 30 years)—plus interest. (In general, your interest rate is supposed to reflect how much of a risk the bank is taking on you—in short, whether it thinks you’re likely to pay back your loan.) The house itself serves as collateral: If you don’t pay the bank back, it can come and take the house—in other words, foreclose.
The documents associated with mortgages are more complex. There’s the mortgage loan itself, which resembles a contract and lays out the terms of your loan and the property backing it. There’s also a mortgage “note”—essentially, your IOU to the bank, in which you promise to pay the loan back over a certain time period, at a certain interest rate, in return for the property. Once mortgage documents were properly signed and notarized, they were generally filed in county courthouses around the country.
But in the early 2000s, the mortgage market began to change.
Many accounts of the mortgage crisis attribute its initial origins to a decision by the Federal Reserve—the country’s central bank—to keep interest rates low. (Former Fed Chairman Alan Greenspan, however, has argued that it was actually long-term mortgage interest rates, not short-term federal rates, that produced the housing bubble.)
In any case, low interest rates had two effects. First, they made investing in US Treasury bonds—once a safe investment with modest returns—less attractive. Since low interest rates meant low returns, investors had to look elsewhere for relatively safe (but still profitable) investments. They found residential mortgages—historically safe, but with homeowners paying 5-9 percent interest, potentially much more profitable than the 1 percent the Fed was offering. Among Wall Street investors—and even government-sponsored entities such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—demand for mortgages grew.
Second, low interest rates made borrowing a lot easier, allowing people who couldn’t previously afford a home to buy one. As home prices climbed, certain types of mortgage loans—loans with super-low up-front interest rates that ballooned in later years, for instance—were made available to people who wouldn’t normally have qualified for home loans. Between 2001 and 2006, the share of the mortgage market that consisted of these “subprime” loans more than doubled.
But mortgage-hungry investors weren’t interested in buying up individual mortgages—which is precisely where investment banks and GSEs like Fannie Mae and Freddie Mac got involved. They bundled thousands of mortgages—some high-quality, some subprime—into large pools known as “securities.” Backed by the steady flow of monthly mortgage payments from people like Valdez, the securities could then be sold to investors—including rich people living in Europe, large endowments and even state pension funds.
Rising home prices fueled the demand for mortgage-backed securities. In some cases, this prompted mortgage lenders to go out and find more people to lend to—even if those people shouldn’t have qualified. But, since the lender would essentially turn around and sell the mortgage to a bigger bank—which in turn would sell it off to an investor—lenders didn’t have to worry about whether a person would default. It would be out of their hands by that point. Besides, home values were still rising. Worst case scenario, a default would simply lead to foreclosure, and the bank or investor would get the still-appreciating house.
“That’s the point where it went too far and crossed the line and blew up,” Hogler Ericsson, a former banker for Bank of America, tells SFR. “We get in these manias where there’s a point where it makes sense, and there’s a point where it goes too far. It’s all mania.”
Diligence got lost along the way. Instead of making sure homeowners like Valdez had solid-enough credit to afford their mortgage payments, banks often didn’t even check before giving them large loans.
Many lenders also stopped filing mortgages on paper, as was previously standard practice. The Mortgage Electronic Registration System, or MERS—a privately owned electronic database of mortgages—made it easy for banks to sell mortgages quickly to other banks, and to avoid paying county filing fees.
Often, mortgages moved so fast that the loan documents couldn’t keep up. Every time the mortgage changes hands, the loan documents are supposed to follow, with the transfer being properly stamped on the note. Instead, the note itself was often lost as banks scrambled to sell mortgages off to other banks as quickly as possible.
“These banks were in such a hurry to move this money along—to move that note like a hot potato—that they didn’t bother to do the things they needed to do to show the chain of title, to show, finally, the last guy who had the right to enforce the note,” Yohalem says.
In February, New York Attorney General Eric Schneiderman sued three major banks for their use of MERS, calling it a “bizarre and complex end-around the traditional public recording system” that allowed them to avoid paying $2 billion in recording fees.
“Mortgages are required to be recorded in the county courthouse,” Yohalem says. “That’s how you know who owns a house. And, every time the house changes hands, the mortgage needs to change hands.”
But often, it didn’t. This made conditions ripe for “fly-by-night mortgage companies,” Yohalem says, that were willing to lend money to “anybody who would take money.”
That banks need to possess the note of a house in order to foreclose on it is the crux of a case Yohalem argued before the state Supreme Court last month. If the high court rules in his favor, it could significantly alter the shape of foreclosure cases in New Mexico, shifting the burden of proof from the homeowner to the bank.
One of the “fly-by-night” lenders that proliferated during the housing boom was Equity One, which in 2006 sold a $227,000 mortgage to Mary and Joseph Romero, two Chimayó residents who, at the time, ran a small clothing and music store.
Equity One (which was bought by AIG in 2008) allegedly sold the Romeros a NINA loan, which stands for “no income, no asset.” That meant that the lender didn’t have to verify whether the Romeros had enough money to pay their house off.
For the Romeros—who, according to court documents, had only high school educations and together earned less than $13,000 in 2005—defaulting was practically inevitable. It didn’t help that their shop shut down in 2008. On April 1 of that year, according to court documents, the Bank of New York, which claimed to own their house, filed for foreclosure. The issue has been in court ever since.
Last month, Yohalem—representing the Romeros—told the state Supreme Court that BoNY (which merged with Mellon Co. in 2007 to become Bank of New York Mellon) couldn’t foreclose because it doesn’t have the original mortgage note that the Romeros signed six years ago.
In previous courts, BoNY introduced a copy of the Romeros’ mortgage note showing two endorsements, or signatures, indicating where the note had traveled: from Equity One to its sister company and then to JPMorgan Chase. No paper trail shows that the note ever made it to BoNY— so, Yohalem says, only JPMorgan can enforce a foreclosure.
“A third party can’t say, ‘I own it,’” Yohalem says. “You’ve got to show how you got it, why is it yours?”
BoNY has argued that the endorsement to JPMorgan was “added by mistake and should be disregarded.” But, in the high court hearing, BoNY also submitted a US Securities and Exchange Commission filing showing that JPMorgan had signed over “select portions of its corporate trust business…to the Bank of New York” in 2006. To Yohalem, that’s extremely vague.
“It doesn’t say that the Romeros’ loan is what got transferred,” he says. “It doesn’t say any of that.”
Using the SEC filing as evidence that JPMorgan did in fact transfer the house to BoNY also blatantly contradicts the argument that the JPMorgan endorsement was a “mistake,” Yohalem argues.
“It’s not a mistake,” he says. “That’s a lie. A cheap lie.”
In the late 2000s, the housing boom began to implode. Home prices declined, and homeowners started defaulting on their mortgages. Defaults often meant that the most profitable option for investors was to kick people out of their houses. That way, banks could seize the houses and auction them off, creating a new revenue stream.
“A lot of them, unfortunately, can’t afford the house they’re in,” Albuquerque bankruptcy lawyer Arun Melwani says of homeowners, “and that’s the sad truth.”
Jerry Lynch is one of them. In late August, Lynch got a letter demanding that he move out of his house in the Tierra Contenta affordable housing subdivision on Santa Fe’s south side. If he didn’t, Homewise—the Santa Fe-based affordable housing nonprofit that helped Lynch buy his home 14 years ago—threatened to get a court order from the county sheriff in order do so.
In 2003, through World Savings Bank, Lynch refinanced the $76,000 mortgage on his modest, 1,000-square-foot house.
In the end, it didn’t help. Lynch stopped making monthly payments in June 2010. He applied for a mortgage modification, but didn’t make the cut. Wells Fargo, which had acquired World Savings Bank through its acquisition of Wachovia in 2008, filed for foreclosure on his house a few months later.
Previously an electrical engineer, Lynch hasn’t had steady work since November 2010. At 63, his main income comes from monthly Social Security payments that amount to less than $1,000 a month.
This August, Lynch met with Homewise Executive Director Mike Loftin to discuss the issue. In the conversation, which Lynch recorded, he repeatedly asked Loftin to show him the loan documents for his house to prove that the nonprofit now owns it.
“You’re just going to have to take my word for it,” Loftin responded.
Loftin says Lynch seems confused—but even Loftin doesn’t seem to fully understand the situation.
“His position was [that] we don’t own the home,” Loftin tells SFR. “I said, ‘Well, that’s not true, but I don’t know how to prove it.’”
According to a special master’s deed, Homewise bought Lynch’s home in a foreclosure auction on Nov. 1, 2011. Loftin says it did so to ensure that it would still house lower-income people.
Micha Valdez considers the court documents in Lynch’s case problematic. The “order approving sale” of Lynch’s house to Homewise does not list the date Homewise acquired his property. Nor is it notarized. Valdez says that these are examples of basic information that needs to be filled out to complete the foreclosure process.
Lori Gileno, the Washington auditor, dug up a lien report on Lynch’s property. While the foreclosure lawsuit filed by Wells Fargo named Lynch, Neighborhood Housing Services of America, Neighborhood Housing Services of Santa Fe and Discover Bank as defendants, the lien names only World Savings Bank as Lynch’s lender.
World Savings is the bank that Lynch refinanced with in 2003. Gileno notes that the lien doesn’t show how the other financial interests became involved. How, for instance, did a bank like Discover develop a stake in Lynch’s home when Lynch says he never dealt with Discover?
“The whole chain of title is nonexistent,” Gileno says. “You have three parties that have no representation. Where did they come from?”
Gileno says that this is common practice in the housing industry; of the 400 cases she’s audited, she says, not a single one has come back clean.
The discrepancies were enough to make Lynch stubborn. Homewise’s letter gave him until Sept. 3 to get out of his house. When that day came, Lynch sat on his front porch, strumming classical tunes on his guitar. No one came to evict him.
“I’ll stay there come hell and high water,” Lynch tells SFR. “I am not intimidated by the fear of the unknown. I’ll go full-tilt boogie, all the way.”
Like Lynch and Gerald Valdez, Holger Ericsson tried repeatedly to modify his mortgage after Bank of America told him, in 2009, that he qualified for HAMP. But what followed was nothing short of exhausting.
Often, Ericsson would call his lender—only to discover that as many as four different people were processing the documents he had submitted in hopes of modifying the mortgage on his Taos home.
“I have phone records where I was spending four and a half hours a day constantly trying to fix something,” Ericsson tells SFR. “It boils down to just complete ineptness in processing the modification.”
Ericsson isn’t a typical foreclosure statistic. At the height of the housing bubble in 2004 and 2005, he worked as a senior financial analyst in transaction services at the Bank of America’s Charlotte offices. In 2004, he bought a vacation home in Taos.
Ericsson quit Bank of America the following year over disagreements with his boss. At the time, he had other properties. He ended up selling them—which, along with consulting work and temporary jobs with corporations like Pfizer, helped him get by. Still, much of his time was spent attempting to save his Taos home.
“Imagine it’s your full-time job,” he says. “Imagine that, when you complete information and they lose it, you spend hours on the phone saying, ‘I sent this to you, and I can prove it.’ You keep doing this, and it takes more and more of your time—until you just give up.”
In September 2010, Ericsson got a letter from the bank stating that he didn’t meet HAMP’s standards, but could enroll in a private mortgage modification program at a much higher rate. He turned it down, all the while paying temporary rates set by the bank on his house.
In March 2011, Ericsson says, the bank foreclosed on his house. He challenged the foreclosure in court but eventually gave up in order to focus on work. The foreclosure finally went through last month.
Around the same time, Ericsson says, Eighth Judicial District Judge John Paternoster told him that no matter how right he may be about the bank’s mishandling of his modification documents, the law can’t force a bank to modify a mortgage. That’s because HAMP was written as an incentive program, meaning that the government doesn’t require banks and investors to join it, but simply rewards those who do.
“The government could force the banks [to participate in HAMP] through an act of Congress,” Melwani says. “They just decided not to do it that way.”
That doesn’t do much for homeowners because, in most cases, foreclosure offers investors a better return than modification.
Ericsson has a theory as to why homeowners constantly got the runaround when trying to qualify for programs like HAMP.
“I don’t think any of the banks believed it was possible to modify,” he says. “At the end of the day, all the bank can do is gather info and give it to their investors. The bank was caught in the middle.”
“Investors aren’t desperate,” he adds, “but these homeowners are desperate.”
Back in Santa Fe, Jerry Lynch is, as of this writing, maintaining his ground.
Five days after he got the eviction notice, Lynch received an email from Alberto Granados, a controller with Homewise, which said he now had until Oct. 1 to leave his house and find a new apartment. Again, nothing happened.
Lynch says he won’t budge unless a sheriff knocks on his door.
“I don’t know if there’s such a thing as righteousness in the US law anymore, especially in the foreclosure scams across the nation,” he says.
He’s planning to sign a petition being drafted by Micha Valdez and local attorney Ana Garner. Recently, Micha sat at a Starbucks with three Santa Fe homeowners—a 20-year federal employee, a grocery store clerk and a former small business owner—to hear them tell their foreclosure nightmares to a local reporter.
Each story was complex in its own right, but all came to the same conclusion: they needed relief. The petition, which they’re planning to sign and send to all members of Congress, calls for restoring foreclosed homeowners’ credit ratings and returning their homes, or the financial equivalent of their homes, to them.
Micha, a Christian, says what’s needed is a “year of jubilee,” or forgiveness for homeowners in default. It’s not an unprecedented concept; Iceland, for instance, enacted a large-scale debt relief program after the 2008 crash.
But the New Mexico Supreme Court could already be on the cusp of significantly impacting homeowners facing foreclosure if it rules in the Romeros’ favor.
“Homeowners would be left alone until the proper owner can come forward,” Yohalem says.
Recent rulings in other states have been split on that issue. The New York State Court of Appeals, the Oklahoma Supreme Court and the Washington state Supreme Court recently ruled that banks cannot foreclose on homeowners without the original note. Yet courts in California and Arizona have allowed banks to foreclose without proving ownership of the mortgage notes.
Gileno says the Washington state ruling has halted many foreclosures. But she warns that many banks will continue the same foreclosure practices because the majority of homeowners won’t know what’s going on, or have the money to lawyer up and challenge it.
For Valdez, relief can’t come soon enough.
After six attempts, he says he was told he couldn’t modify the mortgage on his Santa Fe home because the investors in his mortgage weren’t participating in HAMP.
“It’s like you’re shot out of the water before having a chance,” he says.
On a recent weekend, he sits in the living room of his new home in Albuquerque’s northeast side—the home his parents bought, years ago, for their grandchildren—filling out a form.
“I’m fortunate,” he says of the Albuquerque home, which is a little more than half the size of the home he lost. “If my parents didn’t have this house, I’d be homeless.”
The form he’s filling out is an “independent foreclosure review” that came in the mail from Rust Consulting Inc. The company promises to help Valdez recover money if it deems his foreclosure improper. Valdez doesn’t trust it, but he says he’s run out of options.
“I don’t feel comfortable,” he says. “I think these are the same very people that messed this whole thing up.”