Ahmed Abdelfatta, a car salesman in Sunnyvale, Calif., bought a 1,170-square-foot home for $675,000 in 2005. His mortgage was about $540,000, and he took out a second mortgage of $135,000 to cover the down payment.
Two years later, Abdelfattah, now 52, was laid off and could no longer make his house payments. The bank foreclosed on his home.
After a house has been sold in foreclosure, according to California law, owners with loans like Abdelfattah's are protected from being pursued for any other debts on the same property. But Abdelfattah started receiving letters from Heritage Pacific Financial, a debt-collection and consolidation agency in Plano, Texas, that he'd never heard of. The company demanded he pay back the second mortgage.
"They said, 'You owe us this money.' I said, 'You know that must be a joke because the house went in foreclosure,'" Abdelfattah told ABC affiliate KGO in San Francisco. "When I didn't respond to them, they started calling me and calling me. They say, 'You have to pay us.' And they got my wife's cellphone. They start calling everybody. They called my neighbor."
Although a judge has since dismissed Abdelfattah's case, he is still unsettled by the experience. "I couldn't sleep at night, being accused of fraud," he told KGO.
And his credit rating is still negatively affected by Heritage Pacific's claim.
Heritage Pacific is run by Chris and Ben Ganter, identical twin brothers who starred in "PayDirt," a reality-TV show about making money in the Dallas-Fort Worth real estate market.
When the market tanked, they started their company in 2009. Since then, they have purchased about 40,000 second-lien mortgage notes across the country, including California.
"Heritage Pacific Financial buys mixed mortgage pools from other secondary-market participants," said Ben Ganter, who runs Heritage's legal department. "The mix consists of mortgage loans prior to foreclosure and post-foreclosure."
A large portion of their business involves suing homeowners who have failed to repay their second mortgage loans, even after the bank has foreclosed on their homes. Abdelfattah was one such case: In May 2010, Heritage Pacific named him in a lawsuit that claimed he had used fraud to obtain a second mortgage, California Watch.org reported.
Ganter says California law allows Heritage Pacific to collect on second mortgages where they can prove borrowers committed fraud. "We are suing people for mortgage fraud," he said. "They lied about how much money they made, they bought multiple properties and when they failed to make money, they walked away from the property."
He added, "For all the homeowners who honestly obtained their mortgages and honestly lost their homes, how do you think they would feel knowing that people can buy houses, as investments or personal residences, lie about their income, their intention to live in the house as a primary residence, their employment and-or savings, their intention to pay back the loan, and they can walk away from that house without being held financially responsible to anyone?"
Attorneys for people who are counter-suing argue otherwise. "They must have a business model in which they believe they can make a profit from pursuing people on debts that they've probably purchased for pennies on the dollar," said Gary Neustadter, a Santa Clara University law professor representing three people being sued by Heritage Pacific in bankruptcy court.
"Their objective is to collect money, and they're trying to collect as much as they can as fast as they can," said Will Kennedy, a consumer law attorney in Santa Clara, Calif., who is representing Abdelfattah and parties involved in a class-action lawsuit against Heritage Pacific. "They only sue on second mortgages, which range from $70,000 to $150,000. Twenty percent of that is a lot of money. They get these loans very cheap, so they only have to collect a little bit to make money."
Kennedy argues that most of the mortgage applications were legitimate, and that the only reason homeowners stopped paying their debts was because they lost their jobs and had no income. He also maintains that the bulk of the original mortgage applications were signed by brokers who lied.
And he argues that Heritage Pacific's lawsuits against people with second-rate mortgage debts of less than $150,000 are illegal under California law. "Legally, you can only sue for fraud if the amount is more than $300,000," Kennedy said.
(A Santa Clara County Superior Court judge threw out Heritage Pacific's claim against Abdelfattah in March because the alleged fraud involved a loan for less than $150,000.)
Heritage Pacific does send letters to borrowers, offering to stop pestering them if they pay back a portion of the original loan. But it has also filed more than 220 bankruptcy cases in federal courts in California, including a claim against Oscar Trejo, a San Jose resident who invested in properties and later lost them all in foreclosures.
Shortly before he expected to exit bankruptcy in November 2012, Trejo received a letter from Heritage Pacific saying it had asked a bankruptcy judge not to erase its $88,800 claim against him. The company alleged that he had overstated his monthly income. A judge later ruled that that while Trejo didn't make the $9,500 a month he said he did, the lender had "ignored obvious problems" with Trejo's loan application and couldn't block the discharge of his $88,800 debt, CaliforniaWatch.org reported.
Heritage Pacific has appealed that ruling to a Bankruptcy Appellate Panel, arguing that the lender's reliance on Trejo's undocumented assertions reflected "the custom and habit of the mortgage industry at the time."
Trejo's countersuit against Heritage Pacific is scheduled for a jury trial in July.