The Mortgage Mess: Unscrupulous Lenders, Unsuspecting Borrowers

Victims struggle to keep their homes after lenders leave them in financial jam.

January 8, 2009, 1:14 AM

Sept. 10, 2007 — -- 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.

"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.

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.

"She made it very clear it's a fixed rate for the first five years of the loan," Balderama told us. "We thought we were getting a good deal. A very good deal."

But Balderama said she was stunned when the second monthly statement arrived in the mail to find that the rate was fixed not for five years, but just one month. The interest on her mortgage loan jumped to the far higher rate of 7.8 percent.

"My heart started beating fast and I was like, uh-oh, what am I going to do about this?" she said.

For now what Balderama is doing is struggling to make the payments. The broker has not returned their calls or ours.

"Anyone can be a victim of that kind of deceit no matter how sophisticated they are," said Blumenthal.

Fair warning, perhaps, but for many homeowners, probably too late.

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