House of Cards: How Job Loss, Lack of Education and Creative Financing Steal the Dream of Home Ownership
He shuffles around the corner clutching a typed notice in his hand, making his way past the Guilford County Clerk of Court’s administrative suite and down the long hallway where a continuous bulletin board stretches the length of the wall, subdivided into columns headed with numbers for the day of the month, each one containing a headache-inducing array of sale notices.
Wearing a chestnut-colored snap-cap and sensible slacks, heavy black-framed glasses focusing quizzical eyes, 80-year-old Govan Tate looks all of an old-school man of the world, and the stoop in his walk and smooth skin stretched over hollowed cheeks do not detract from his obvious pride. With a curt “excuse me” he positions himself in front of the column marked “13” and examines the notices, glancing from the jumble of papers on the wall to the one in his hand. After a moment he shakes his head and walks down to the end of the hallway and back before accepting the assistance of a stranger.
The notice in Tate’s hand contains his name in bold letters, followed by the notation “single.” The other respondent is listed as “Leo Pearson, separated.” The notice lists the address for Tate’s home. And it does indeed state that the house will be put up for sale on Sept. 13 at 3 p.m. – about an hour from now, to be exact. Yet there is no corresponding public notice on the bulletin board. Later, a deputy clerk in the special proceedings office will explain that Tate’s notice is outdated because the hearing was continued, and actually a new hearing is scheduled for today with the substitute trustee. A foreclosure proceeding involves an intricate set of players, and in this case the substitute trustee, a Wilmington-based law firm called Brock & Scott with offices in Greensboro, is acting on behalf of Deutsche Bank, the financial institution that now owns the debt. Deutsche Bank, in turn, is servicing the original loan made by AmeriQuest Mortgage Securities.
The special proceedings room at the Guilford County Courthouse is a modest-sized room with plate-glass windows facing Eugene Street. With waist-high cubicles arranged to fit three deputy clerks, it accommodates members of the public with a counter running most of the length of the room. The deputy clerks make easy small talk with the stream of buyers who come in to scour the “upset bid” pail, which holds foreclosure case files for 10 days after sale, and with the substitute trustees, who come in periodically to check on the progress of paperwork. Occasionally respondents, such as a distraught widow unclear about whether her house will be padlocked before the foreclosure sale, come in to ask for an explanation of procedural details.
Sometimes the foreclosure hearings are held at the counter, with lawyers for the lending institution leaning over the counter shoulder to shoulder with the homeowner and their counsel. Most often, Assistant Clerk of Court Wanda Locklear ushers the two parties back into her cramped office on the side of the special proceedings room. This arrangement will end on Oct. 1, when the procedure will move into a proper hearing room, say Locklear and her boss, Clerk of Court David Churchill.
The hallway outside the special proceedings office functions as cut-rate real estate bazaar, with buyers chatting up substitute trustees, buying properties and conferring with colleagues by mobile phone to have them look at properties listed in the files found in the upset bid pail.
Karen Gallop has been buying for 20 years; her daughter is also in the business. Gallop says the ranks of buyers prospecting the offerings have increased since she got started, and she fears some of them do not have the expertise to avoid getting stuck with properties that have hidden financial obligations attached.
“We either buy it to rent, to flip it to an investor, or we buy it to fix up and get full market value,” she says. “If we’re going to flip it, we keep the profit to five thousand and below. If we’re going to buy it to fix it up, we want to make twenty thousand.”
Meanwhile, Tate has attended his hearing, which has apparently done little to resolve his confusion. Asked what he was told by the hearing officer he shrugs.
He’s fixated on the bold-faced letters on his notice identifying the location of the lender: Orange, Calif.
“If they did all this in California, how can they knock me down for it?” he asks, perhaps not realizing that the company has an office in Greensboro.
Then Tate avers.
“I might have signed some papers,” he says, “but let me be honest with you: I can’t read.”
Whether Tate was taken advantage of by a dishonest family member or an unscrupulous lender, or even was an accomplice in his own undoing, his troubles reflect a disturbing trend in North Carolina. Data released by the NC Administrative Office of the Courts indicates that foreclosure filings almost tripled in this state between 1998 and 2005, from 15,282 to 42,832. Foreclosure filings increased by 163.9 percent in Guilford County, from 1,047 in 1998 to 2,764 in 2005. While it’s a steep rise, the increase here is nowhere near as dramatic as that of the state’s two largest urban counties. Foreclosure filings increased 290.6 percent in Mecklenburg County, which includes Charlotte, and 263.5 percent in Wake County, home to Raleigh, over the same period.
A review by YES! Weekly of all the roughly 200 foreclosure cases filed in Guilford County Court during the first month of 2006 isolated 69 cases that resulted in final sale. Of that sample, about two-thirds of the loans figured at less than $100,000, with most of the rest falling below $200,000.
Locklear, who by her own estimation conducts 70 to 80 foreclosure hearings a week, says she finds that economic insecurity is spread across the socio-economic strata.
“It’s a variety of people,” she says. “It’s higher income, middle class, lower class. The majority of the evidence presented to me is that they defaulted because they lost jobs. People with two and three hundred thousand dollar homes had a job with a salary of a hundred thousand dollars. Now they’re having to work for sixty thousand dollars. You can see why they can’t meet those payments.”
Many observers, including Churchill, point to 2001 as the year that home foreclosures began to increase dramatically in North Carolina.
“Although the overall statewide economy is now improving, many families have not recovered from the massive job losses that occurred beginning in March 2001,” NC Justice Center staff attorney Carlene McNulty told members of the NC House Select Committee on Foreclosures back in February.
The number of foreclosures reached a plateau across the state and in Guilford County in 2003 but both real estate speculators and consumer advocates anticipate a new surge of home foreclosures in the next year or two. The reasons: adjustable rate mortgages, or ARMs as they’re often called; interest-only mortgages; and 100 percent financing loans that allow the homeowner to borrow money for the entire value of the home without making a down payment.
“Everybody was getting these ARMs at two and three percent,” Gallop says. “All those interest rates are going up to eight and nine percent. All these people that were just barely making it before are going to be in trouble in the next year, year and a half.”
Loans made with adjustable rate mortgages made up only 18.8 percent of the home foreclosures in the sample reviewed by YES! Weekly. Though the share appears relative small now, McNulty says adjustable rate mortgages are likely to account for “the next wave of foreclosures” in the next couple years.
Part of that has to do with the fact that the Federal Reserve has been raising interest rates since 2001, when the economy began its downturn.
“Because we’ve had low interest rates for quite a while, a lot of the people who could have gotten into a home have gotten into a home,” says Al Ripley, a consumer and housing specialist who works with McNulty at the NC Justice Center in Raleigh. “What it has done is created inflationary pressures on housing. It creates pressures [for lenders] to continually try and create more and more aggressive ways to get people to take out loans.”
With an adjustable rate note stipulating an initial interest rate of 11.8 percent, allowed to increase two percentage points every six months with a cap of 17.8 percent, the loan that refinanced Govan Tate’s house in April 2005 seems in hindsight like an unlikely strategy to allow someone to stay in their home. Tate’s initials are on every page of the promissory note and deed of trust, although he insists he only became familiar with the terms of the loan when he visited the courthouse on Sept. 13.
Whether AmeriQuest applied pressure to rope Tate and Pearson into the deal or Tate’s fellow borrower engaged in trickery is unclear. Pearson, whom the substitute trustees unsuccessfully tried to reach by certified mail in West Chester, Pa. could not be located.
AmeriQuest did not respond to a media inquiry made by YES! Weekly on Sept. 15, but the company’s recent history suggests its loan officers have not been above running roughshod over unsophisticated borrowers. Once known as the nation’s largest sub-prime lender the firm urges prospective borrowers “to consolidate debt, lower monthly payments and get cash out.”
A little more than a year after refinancing Tate’s home AmeriQuest announced the closure of its 229 retail branch offices, including one in Greensboro, following a $325 million settlement with attorneys general in 48 states and the District of Columbia to compensate borrowers who fell prey to what the Florida Attorney General’s office alleged were “inflated appraisals, unjustified fees and penalties, and high pressure and deceptive tactics against prospective borrowers” in loans obtained between Jan. 1, 1999 and Dec. 31, 2005.
“Mr. Tate said he couldn’t read, so he evidently signed something and he didn’t know what it was,” Locklear says. “You have people out there that are preying on elderly people. Sometimes it’s a relative, sometimes not. It makes you very sad.”
Locklear has signed an order allowing the sale of Tate’s home to go forward on Oct. 3.
In the sample of completed foreclosure cases reviewed by YES! Weekly, the average amount of time between the date the loan was taken out and the date foreclosure proceedings were initiated was less than five years. Consumer advocates, experts and county officials agree that it is impossible to determine how many of those represent original loans taken out by first-time homebuyers or, as in Tate’s case, refinancing loans. But the availability of easy credit in recent years and the proliferation of creative financing arrangements, often with high interest rates that fluctuate with the movement of larger wholesale money markets, suggests to experts that an increasing number of those faced with losing their homes to foreclosure are first-time homebuyers.
A Federal Reserve bulletin released Sept. 8 found that 54.7 percent of blacks who took out conventional home loans received higher interest rates compared to only 17.2 percent of whites. In the bulletin, the authors declare that “over the past decade or so, the mortgage market has changed markedly.
“[In the past] borrowers either did or did not meet the underwriting criteria for a particular product,” the report continues. “Those who met the criteria paid about the same price; those who did not were denied credit.”
But recent years have witnessed “remarkable changes in the mortgage market” as a result of “advances in technology, better access to information on the credit histories of individuals, increased competition and the maturation of a robust secondary market for loans.
“Applicants who are less creditworthy or who are unwilling or unable to document their creditworthiness or income are increasingly less likely to be turned down for a loan,” the report continues. “Rather they are offered credit at higher prices.”
McNulty testified to the Select Committee on Home Foreclosures in Raleigh: “Credit is much more accessible to households today, which has enabled many more families to become homeowners. This proliferation of available financing, however, has resulted in some individuals entering into loans that they either did not understand or simply could not afford.”
In 2004, President Bush won reelection based in part on a domestic economic agenda encouraging what he called an “ownership society.” He correctly argued that more Americans owned their own homes than ever before. The Federal Reserve reports that the number of applications for loans to purchase homes more than tripled from 1990 to 2005, and the number of actual loans purchased to finance homeownership increased from 5.5 to 30.2 million.
The rising rate of foreclosures suggests that the transition of millions of people from the renting to landed classes has taken place under perilous circumstances. Much of the increase in homeownership, experts say, has been made possible by banks and mortgage companies offering sub-prime loans, also known as “non-conforming loans,” which typically come with higher interest rates and allow lenders to stray further from established guidelines.
“The nonprime market segment has grown substantially in recent years,” the Fed reports. “One source estimates that from 1994 to 2005, the dollar volume of sub-prime loans increased from $35 billion to more than $600 billion.”
The authors of the recent Fed bulletin write that sub-prime loans are estimated to have accounted for 20 percent of all mortgage originations in 2005, up from less than 5 percent in 1994.
The lenders found in the YES! Weekly sample of Guilford County home foreclosure cases resulting in final sale included both traditional banks with longstanding North Carolina roots and smaller specialty mortgage firms. Winston-Salem-based Branch Banking & Trust Co. was responsible for the second largest share of home foreclosures, after the Indiana-based Irwin Mortgage Corp.
The average initial interest rate for loans made by BB&T for which foreclosure actions were initiated that month was 7.1. In one case, the bank provided a loan valued at $34,000 to a couple purchasing a home in central High Point. With a 7.6 percent interest rate, the loan would have required the couple to pay an additional $23,959 in financing charges if they had made the payments required to retire the debt over a 30-year period.
Among the lenders charging initial interest rates in excess of 10 percent on loans that have resulted in foreclosures are Carolina First Home Equity, a company with an office in central High Point that charged 14 percent interest for one loan, and SouthStar Funding, an Atlanta company specializing in sub-prime loans and adjustable rate mortgages.
Tennessee-based Clayton Homes, owned by Berkshire Hathaway, charged 12 percent interest for a February 2000 loan to cover a manufactured home in Greensboro’s Pomona neighborhood. If the borrower had completed her scheduled payments over 30-year period of the loan’s maturation she would have paid more than three times the principal amount of $85,736.
“Mortgage brokers are in this business to make as much money as they can,” Ripley says. “They don’t keep the loan; they sell the loan in the secondary market. There is little incentive for the mortgage broker to make sure the borrower can continue to make payments on the loan.”
Economists, consumer advocates and buyers who profit from foreclosures agree that lack of financial literacy plays a significant role in borrowers losing their homes.
“Borrowers with less experience in the mortgage market, such as first-time homebuyers, may be less likely than experienced borrowers to negotiate,” the Fed bulletin states. “These differences in negotiation propensities may be correlated with race, ethnicity or sex. For example, minorities are disproportionately first-time homebuyers.”
A common lending scheme that can get first-time homebuyers in trouble is 100 percent financing, says Gallop, who advocates mandatory counseling for those who are taking the first step of buying their own home.
“I think people should have at least a minimum amount of investment in their property,” she says. “If you haven’t saved up a thousand or two thousand dollars, why should you think you’re ready to own a home? I think they made it too easy to get into the house, and they don’t care if it’s going to be foreclosed in two years.”
And yet restricting access to homeownership – a commonly cited hallmark of the American dream – would be unlikely to address the racial inequities evident in lending patterns. Homeownership itself reflects the longstanding tilt of disadvantage experienced by blacks and other non-whites in housing. As the recent Fed bulletin notes, denial rates for home loans remain consistently higher for American Indians, blacks and Hispanics than whites and Asians, with blacks generally having the highest rates.
Depressingly, while some of the home foreclosures in the sample appear to reflect new economic insecurity among white-collar workers residing in the outer suburbs along Greensboro’s northern and southern rims and in north High Point, the foreclosures clustered in predominantly African-American neighborhoods near the two cities’ respective urban cores reflect a persistently frustrating set of interlocking circumstances.
“Areas with higher unemployment rates and larger minority populations are more likely to have higher incidences of higher-priced lending,” the Fed reports. Other factors positively related to a greater incidence of higher-priced lending include the percentage of population with less than a high school education.”
When job loss, healthcare emergencies, interest rate fluctuations or a combination of those circumstances result in homeowners falling behind on mortgage payments and losing their homes, observers point to a vicious cycle that can create widely shared social burdens.
“A home that is lost to foreclosure invites crime, drugs and gangs,” McNulty said in her testimony. “There is a negative impact on the tax base, often coupled with an increase in the need for services such as police protection, rent subsidies, funds to provide for homelessness.”
Keith Ernst, a staff attorney at the Center for Responsible Lending in Durham, echoed McNulty at June hearing held by the House Subcommittee on Financial Institutions and Consumer Credit, chaired by Alabama Republican Spencer Bachus.
“For millions of families, owning a home ultimately makes the difference between merely surviving between paychecks or building savings for a better future,” he said. “Unfortunately, race and ethnicity continue to be strongly correlated with wealth.”
Citing the Fed, he told the panelists that in 2004 white families had a median net worth of $140,700 while non-white or Hispanic families had a median net worth of only $24,800.
“As a result, making mortgage credit arbitrarily more costly for African-American and Latino borrowers has significant implications,” Ernst said, “especially since ownership is also associated with higher attainments in education, better physical health and safer neighborhoods.”
There is some debate about what role discrimination plays in the comparatively higher interest rates paid by non-white borrowers. Even the Fed has acknowledged loan prices in the sub-prime market are often determined on an “individual basis and not strictly according to credit risk, cost factors, or competitive conditions.”
The Center for Responsible Lending released a study in May based on a database of 177,000 sub-prime loans that included detailed information on mortgage pricing, loan terms and what the study’s authors call “borrower risk characteristics,” allowing them to isolate race and ethnicity as a factor in whether borrowers received a higher-rate loan in the sub-prime market.
“We found that race and ethnicity -‘ two factors that should play no role in pricing – are significant predictors of whether a sub-prime loan falls into the higher-rate portion of the market,” Ernst, one of the study’s authors, told Bachus’ panel. “Race and ethnicity remained significant predictors even after we accounted for the major factors that lenders list on rate sheets to determine loan pricing.”
Advocates can only speculate why blacks and Hispanics tend to get steered into higher-interest mortgages, but they point to a range of opportunities for abuse.
“In the sub-prime market, substantial leeway exists for prices to be altered without regard to any credit-related criteria,” Ernst testified. “The most obvious example is found in the context of ‘yield-spread premiums.’ Basically, yield-spread premiums are a bonus paid to brokers for placing borrowers in a loan with a higher interest rate.”
McNulty told North Carolina lawmakers: “In my experience, many consumers facing foreclosure over the past few years have been victimized by predatory lending or other scams. Mortgage payments are being misapplied with increasing frequency, and information supplied by the lender in the foreclosure process often provides little information, even to trained advocates, to enable a consumer to prepare a defense.”
For Govan Tate, of course, knowing how to read would have been at least a start in understanding the intricacies of his loan agreement. But if he missed the fine print he at least has some sense of land values and real estate markets. His is one of the few houses in a sylvan stretch of southwest Greensboro near Interstate 40 populated with apartment complexes bearing names like Colony Square, Pioneer Way and Overland Crest. One of them, a sanctuary of vinyl-sided town homes surrounded by a 10-foot wooden fence, sets next door to his house.
The day after his hearing Tate receives a guest at the house that he stands to lose clad only in underwear and a silver cross. Bowing to propriety, he pulls on a pair of faded jeans rolled up to his calves. He spends most of his time in the large living room, where a thin blanket lies across the couch, a television at the back of the room blares the ephemera of “Oprah”-style talk shows and local news, and the portraits of two women stare across the space from either side of the mantle.
Tate’s mother, a stern, imposing person whose look of resilient composure suggests a woman not likely to suffer fools gladly, gazes from the photograph on the right. At left a woman of indeterminate age dressed in what appear to be a chauffeur hat, cocktail dress and tinted glasses wears a jolly expression. Described by Tate as “my one true friend,” she lives in the country outside of Fayetteville.
If there is a picture of Tate’s ex-wife in the room he doesn’t mention it.
“I’ve been divorced from her,” he says. “She moved out to California with her loud-mouthed sister and lived for years and years. After thirteen years I went down to the courthouse and got a divorce.”
Tate bought the house with his wife through a Veterans Administration loan. As he is a World War II veteran he agrees that the purchase might have taken place in the 1950s. When asked the value of the original loan, he waves his hand dismissively as if to suggest it was something piddling. Unfortunately, he’s misplaced the original documentation. He does say however that his wife borrowed money on the house at one time and that they took out a new loan for $48,000. At some point she also appears to have surrendered her half of the house to Leo Pearson, her son from before her marriage to Tate.
All that took place before Pearson refinanced the house in April 2005, taking out a new loan for $99,750 with AmeriQuest.
Pearson told Tate he was paying off the loan, which was technically true. What the younger man didn’t say is that he’d taken out a new loan to cover the previous one.
“When this first started happening I could never get a hold of him,” Tate says. Then, apparently forgetting for a moment the foreclosure proceeding that is barreling towards a resolution on Oct. 3, he adds: “Yes, the place will be his when I die. I never took his mother off the loan.”
Tate laughs when told that the promissory note required a monthly payment of $1,010.72; his Social Security check would hardly cover that. He says he didn’t know there was any debt left to pay on his house. And whether Pearson ever intended to pay off the house is unclear. An affidavit of default made by the substitute trustee reflects that only one payment was made, in June 2005.
If it appears that Tate got hustled he would like to make a point about his effectuality as a man who worked hard and supported others in his lifetime – all with the benefit of no more than a third-grade education.
“If a sucker wants to make it in this world all he got to do is go out and goddamn do it,” he says. “I don’t care if you’re white as a snowflake or black as a lump of coal.”
Then Tate itemizes his work history. He drove coal trucks with his father, making home deliveries in High Point beginning at age 11. He “set my mother down,” as he puts it, at age 17. He drove a truck through France and Germany during World War II, and to prove it he summons a hollow metallic echo from his left knee by tapping the replacement hardware. He delivered milk by the bottle in Brooklyn, NY after the war. Still later he drove tractor-trailers across the country.
“I had a pretty damn good life for a dummy,” he says. Then he returns to the subject of his estranged stepson and an expression of pity and scorn flashes from his eyes.
“He coulda made him some good money,” Tate says. “It’s zoned for apartments! Two acres and he lost it all for a ninety-nine thousand dollar loan. He’s supposed to be a college man and educated.”
On Sept. 20 his friend from Fayetteville has committed to take him to the Veterans Administration office in Winston-Salem. Maybe the agency will be able to provide him with some housing assistance. Tate says he doesn’t need the five rooms of this house anyway.
“I’m not going to go to no project, no slums,” he says. “You want it, you’re either going to have to find me another place to live or set me out on the street.”
Staff writer Amy Kingsley contributed research for this story.
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