The Mortgage Mess: Unscrupulous Lenders, Unsuspecting Borrowers

Record foreclosures by homeowners. A growing number of lender bankruptcies. As the casualties from the mortgage mess multiply, so have the crackdowns against a loosely regulated mortgage industry.

(ABC News)

"As we turn over the rocks, what we see are more and more appalling practices that have victimized people who literally have been left with their lives in tatters," said Richard Blumenthal, attorney general of Connecticut.

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Donna Pearce is one of those homeowners struggling to keep her life from unraveling. She is already four months behind on her high-interest loans from New Century Financial.

She says New Century, now bankrupt, got her the loans by lying about her income.

"After all of this blew up in my face, I realized that they falsified my income," said Pearce, a 53-year-old nanny who earns $2,100 a month in Connecticut. "It stated that I made way more than I actually make."

How much more? Pearce showed ABC News loan application documents that listed her income as $5,500 a month.

"You cannot write a loan like this without knowing that absolutely this person is going to fall behind," said Pearce.

Industry Under Fire as Victims Scramble

Blumenthal is one of dozens of state attorneys general now investigating the mortgage industry. He recently filed four lawsuits charging lenders, brokers and realtors with a variety of deceptive practices, including falsifying a borrower's income, lying to borrowers about mortgage rates, and failing to disclose expensive prepayment penalties for borrowers trying to refinance.

"(There's) no question that these practices were fraud," said Blumenthal.

Some say these homeowners have themselves to blame for their troubles, and that they should have known better or should have read the fine print.

But reading the fine print and asking lots of questions did not protect Abigail Balderama, a California homeowner living on a fixed income with a disabled husband.

In a letter obtained by ABC News, Balderama's mortgage broker explicitly offered the couple a fixed rate of just over 1 percent for five years.