Legal Steps to Prevent Foreclosure
One victim of predatory lending got legal help to refinance and save her home.
April 3, 2008— -- Shelia Cruz thought she had found a small piece of the American dream, her own home in Staten Island, N.Y. But what she got was a terrifying headache that would take almost three years to quell.
It started in 2004, as she readied to plunk down $30,000 of hard-earned savings for a down payment on a new home. Much to her surprise, a mortgage broker told her she could keep her money and borrow the entire purchase price of a $400,000 townhouse.
That seemed like a lot of money for a single mother making about $50,000 a year, but Cruz was prepared to believe. She trusted the broker, a friend of a friend, who told her that her payments would be $2,000 a month and over time would likely go down.
So she signed the mortgage papers and moved in.
It was about six months later that she began to have her doubts. She read the documents carefully. They called for a sizeable boost in the interest rate after five years. They revealed that she was paying only interest and none of the principal that would eventually give her ownership of her home. And at the end of 30 years, she would have to come up with an additional $50,000.
Nobody had explained any of this to Cruz, and she suddenly realized that she was in trouble. It was tough enough to meet the monthly payments of $2,000. If they went up at all, she could go into default.
"I realized, 'I'm going to lose the house,'" she said.
Like untold thousands of American homeowners in recent years, Cruz was a victim of predatory lending: The practice of luring borrowers into mortgages that they cannot afford or even hope to understand. Many such victims never recover, losing their homes to lenders in foreclosure proceedings. But others turn their misfortune around, getting out from under bad loans to save their house and home.
How do they do it?
Legal experts say there are a number of ways to keep a lender at bay. In an interview with ABC News, Jessica Attie, a lawyer with South Brooklyn Legal Services who counsels homeowners threatened with foreclosure, offered a few pieces of advice for people faced with foreclosure.
Call a nonprofit housing service or legal aid society to find out who owns your mortgage. They're listed on hud.org, the Web site for the federal Department of Housing and Urban Development.
"You'll need help with this," she said, "because 90 percent of the time, a bank has resold your loan and it's almost impossible to find out on your own who currently owns your mortgage."
It's probably a bad idea to call up the bank yourself. "Experts say many banks will not only not help you, they might get you to sign things that could ultimately harm you," said Attie.
If a bank refuses to renegotiate your loan, hire a lawyer. "There were so many predatory lending practices and loans made with such egregious terms that many were plain illegal," she said. "A lawyer can see if that was true with your loan, in which case you could take the mortgage broker to court to stop the foreclosure."
If none of the above works, sell your house for less than the amount that you owe the bank, if necessary. "Banks will sometimes agree to let you sell [your house] and eat their loss," Attie said. "The leverage you have here is the banks lose less money if you sell the house than if they foreclose and lose more or all of the loan."
Whatever you do, don't hire a for-profit negotiator or think you can solve your problems by declaring bankruptcy. The negotiators "are frequently scam artists who charge fees and produce no agreements," said Attie. And under current bankruptcy law, "judges can't modify terms of mortgages, so you will still have to pay even if you declare bankruptcy."
Cruz eventually found Attie and South Brooklyn Legal Services, though not before spending several agonizing months trying to figure things out for herself.
When she suspected that she had been had, she consulted the New York City Housing Department for advice. The officials there looked at her mortgage documents and found some serious problems.
Among them: The lender had charged her "points," essentially a lump sum of interest that you can pay upfront to get a lower interest rate going forward. One point equals 1 percent of the mortgage amount. But Cruz's lender had significantly miscalculated the points, charging her far more than she owed. When told by the housing department of the overcharge, the lender reimbursed Cruz.
But there was only so much department officials could do for Cruz, so they referred her to South Bronx Legal Services.
The lawyers there took a close look at her situation and came up with a strategy. They could try to get her into an unusual program for refinancing the mortgages of predatory-lending victims or, if that didn't work, they could sue the lender and the mortgage broker for fraud and other deceptive practices.
Fortunately, Cruz qualified for the program. It was essentially a fund created by a finance company several years ago to settle charges that the company had engaged in predatory lending. Cruz could borrow money from the fund to refinance her mortgage on favorable terms. And the terms were extraordinarily favorable: a 30-year fixed rate mortgage at a 4.4 percent interest rate that would actually decrease each year that Cruz made all of her payments on time.
In July 2007, the refinancing deal closed, and Cruz could breathe easy again. She's now paying about $1,900 a month in mortgage installments, with every expectation that the amount will go down.
"I'm really happy," she said, "that I was able to get this type of help and be able to afford the house now."
Cruz says she was lucky to find the refinancing program that gave her such a great deal, but she was also smart. She realized early on -- well before she went into default on her mortgage -- that she needed help. And getting a jump on mortgage problems before they become disasters can make all the difference.
"There are so many people who are going to lose their homes," said Cruz, "who are not going to have the opportunity that I had."