A word here about names. Marcy gave me the go ahead to tell her story, but I've changed names to protect her privacy. The events, locations and quotes however, are as told.

In his conversation with Marcy, Fred Dormutt said her house could be refinanced for "88". The last refinancing had been based on an appraised value of $67,000. Which itself was raised from a prior one of $50,000. The jump to $67,000 had factored in a potential remodeling. Which was never completed. Eventually Dormutt sent an appraiser to Marcy's house. Marcy and her husband paid Dormutt for the appraiser's visit: the fee was not included in the refinancing. The appraiser, who didn't supply his name, also didn't bring a clipboard, tape measure or flashlight. He peered in the bathroom and a downstairs bedroom and spent 10 minutes upstairs. Then he asked "What does Fred want to get?" Marcy said 88. The appraiser said 87. One can only wonder what flaw accounted for the thousand dollar difference. A creaky step? A dripping faucet?

Dormutt then arranged a refinancing for Marcy with a subprime mortgage lender based in California-- which I'll call "New Centurion Mortgage". New Centurion is a national direct lender, whose customers are both consumers and mortgage brokers. One of their specialties is home debt consolidation. Their advertising pitches people with credit problems, using lines such as "no credit check" and "no employment verification" and "you can become debt free". (Apparently money owed New Centurion doesn't qualify as debt.) New Centurion also touts the speed with which loans can be granted, via online transactions.

But even with an electronically sped process, in person signatures are occasionally required. In mid February of 2001, on a cold Saturday morning, Marcy met with agents from New Centurion at a truckstop outside of Madison, Wisconsin. 200 miles from her hometown. The meeting had a feeling of urgency: Marcy was told the papers had to be signed by a specific date in order for her to "get the right financing".

After Marcy made two payments, New Centurion sold her loan to a company based in Texas: Liftoff Loan Servicing. Though Liftoff was presented as a different entity, Marcy noticed certain information remained the same. Liftoff also seemed to be poorly run. Marcy tried to get a copy of her home appraisal from Liftoff-- as she did from New Centurion. Neither company knew what had become of it. And Liftoff repeatedly lost payments. Marcy put post office searches on them and stopped checks. Eventually, a Liftoff secretary found the checks on her desk. But by that time late charges had been tacked on. Which stuck like glue and couldn't be resolved. Maybe because Marcy talked with a different person each time she called. When Winter came and heating bills loomed, Marcy called Liftoff and asked if she could make monthly mortgage payments in two partial payments. A phone rep said sure. But the check went uncashed. When Marcy inquired, another person told her Liftoff did not accept partial payments.

Wanting to get her payments straightened out and to have better records, Marcy authorized Liftoff to take the mortgage payments directly out of her bank account. They did so immediately. Her bank account shows the withdrawal. Yet Liftoff claimed to have no record of the payment. After going round and round with Liftoff and with loan charges growing ever larger, Marcy and her husband decided it was time for a lawyer. With little money, they couldn't afford high priced legal spread or second opinions. Their attorney advised them to escape Liftoff by filing for bankruptcy. Marcy and her husband hoped to keep the house out of the proceedings, but since they refinanced to consolidate debt were unable to do so. And refinancing again was impossible because their home was already mortgaged for more than it was worth.

Marcy and her husband went bankrupt. They got a foreclosure notice 5 days before Christmas, 2002. They received bankruptcy release from the bank which now owns Marcy's house. This bank is a subsidiary of a much larger banking entity, one which until early 2001, held controlling interest in New Centurion. The convoluted relationship between this larger entity and New Centurion has been covered extensively in Inner City Press, a publication which focuses on predatory lending practices in inner city neighborhoods. And in the late 90's the subsidiary bank and its parent company, were the subject of an action filed by Minnesota Attorney General Mike Hatch. For selling customer financial information to a telemarketing firm. The lenders received not only a fee for the info, but a 22 percent cut of net revenue sales.

In Pennsylvania in 2002, the same subsidiary reached an agreement to cover $1 million in loans to 164 homeowners who, in the late 90's, had been ripped off by contractors exploiting the U.S. Department of Housing and Urban Development (HUD) Title I home repair program. The program insures home improvement loans made by lenders to homeowners with poor credit. Contractors working both Pennsylvania and Ohio, hustled homeowners into getting the HUD backed loans, which were financed by a now bankrupt Texas lender. The contractors wrecked rather than repaired, or skipped out without completing work. Leaving many homeowners in serious debt, with liens on property worth less than before the "remodeling". The bank which repossessed Marcy's house was not the lender in this case-- but the trustee for the securities backed by the Title I loans financed by the bankrupt Texas lender. Which had been the largest Title I lender in the nation. Though in existence for decades, HUD's Title I home repair program took off in the 90's like a bat out of hell, when payments on subprime, home repair loans began being bundled into securities which were sold largely to pension and mutual funds.

No doubt Marcy's subprime re-fi made its way into a bundle of securities. Maybe several bundles since her loan moved from company to company. One wonders if it was ever tagged non performing. If so, it would have been a misnomer: Marcy's incredible bouncing home loan could hardly be called a slacker. It re-performed on assorted badly kept books, generated all sorts of fees and was profitable to many. Though ultimately not to Marcy and her family. And the U.S. taxpayer. Subprime mortgages are typically insured by the Federal Housing Administration (FHA). Which means that in case of default, the government steps in and pays off-- even if the loan was based on an inflated appraisal.

But on the positive side, another home is free to enter the hungry housing market. Maybe it won't sell for 88, but dubious appraisals have definitely goosed it past the original 50. An agent handling foreclosed HUD homes (FHA is part of the HUD family) at a nearby branch of a national realtor is believed to be marketing it. Though this seems shrouded in the same kind of confusion that characterized the mortgage servicing. But after Marcy and her family got the sheriff's notice to quit, this agent asked Marcy if she'd want to earn a little money by "broom cleaning" the house. Presumably in preparation for showing. All Marcy could say was "You've got to be nuts". By now Marcy knows nuts. Just recently, Liftoff Loan Servicing sent Marcy a letter informing her they were adding $1000 dollars onto her loan for property insurance. On a home she doesn't own. And which Liftoff supposedly, doesn't own either.

Marcy and her husband made bad moves. They turned a blind eye to dishonesty in the appraisal launched by broker Fred Dormutt. Possibly they refinanced previously with similar disregard. But they were not white collar criminals driven by gross Enronitus, but a lower middle class family trying to keep their heads above water. Plus, the prevalent real estate message is that property values will always appreciate and catch up to appraisals. Till then, why not use credit based on temporarily imaginary value?

Should Marcy and her husband been tougher and more wary? Absolutely. But perhaps they didn't realize the housing industry in this country now runs on caveat emptor. Plus Marcy did many things right. She kept good records of payments and of who said what and when. But dealing with financial institutions in far away states isn't easy. Especially when obfuscation seems the name of the game. Also factor in that people like Marcy can't afford much legal recourse and are disinclined to seek, and are sometimes ineligible for, poverty based legal services. However, one thing people like Marcy do is hit the Internet.

Marcy's story is not unique; just one account from a country wide epidemic. Regional newsmedia tells the same tale again and again. Plus, since QT started covering real estate fraud, I've heard from a number of people other than Marcy who believe they were pushed into default via suspect mortgage servicing transactions. I've also checked out the websites which serve as a forum for people with the same kind of stories. Sure, some of the stories are bogus. Some people just resent having to pay debts. There are bankruptcy chasers trolling for class action suits. But the overall pattern is too large and specific to be ignored. A pattern incidentally, which aside from industry differences, is reminiscent of various classic bunco scams which rely on tangled transactions, long distance obfuscation, legal inconsistency and consumers with little access to recourse.

A homeowner on the edge gets a refi pitch. Sometimes via a mortgage broker, sometimes from a direct lender. After an inflated assessment and a few payments (the number is typically two) the initial out of state company sells the sub prime loan to another company in another state. At times both companies appear to be linked. Sometimes loans bounce through interconnected company after company. Payments get lost, fees are tacked on and records become totally confused. Hidden costs suddenly appear. Phone inquiries are rarely answered by the same person and produce contradictory and downright damaging instructions. The financially strapped homeowner begins to feel caught in an inevitable, downward spiral of ballooning debt. Another refi is impossible. Bankruptcy and/or default seem the only way out.

Essentially, the homeowner in these cases has been steered into a form of mortgage flipping: one which takes place in the mortgage servicing process and is sometimes called "equity stripping". Not all flips are illegal. In your simplest form of mortgage flipping, the flip occurs close to the initial point of sale. In fraudulent instances, buyers are frequently fakes: fronts for crooked developers, mortgage brokers and yes Virginia-- even lenders. These "straw buyers" walk away with a chunk of money and no hard feelings. But with stripping, the homeowner participates in a long drawn out process: they may cheat a little at first, via signing on to inflated appraisals or proof of income, yet they hope to ride out the bumps and remain homeowners. Instead, they get wrung out and tossed aside. Their "ownership" has been little more than a mask under which affiliated financial entities work a complex system. A system which reduces the borrower to something disturbingly akin to a serf. Enmeshed in a transaction which smacks of usuary.

Subprime lending has become highly profitable. Increasing tremendously as lending practice over the past few decades. The affordable housing crisis has grown apace. The increase in subprime borrowing has been partly driven by social shifts, such as single parent households and an attempt to address inequities in home lending. But new inequities have arisen. Some as result of abuse and some via unforeseen consequence. Inflating appraisals and encouraging borrowers to fraudulently qualify for loans, not only drives people deeper into debt but leads them to develop a stake in fraud. And when subprime mortgage holders default, taxpayers frequently pick up the tab. The more disposable income is taxed, the less money people have to spend on homes. Meanwhile, inflated appraisals and a government supported housing market pushes home prices higher. Making subprime borrowing more necessary to more people.

Some of the financial practices which facilitate abuse in subprime lending are not illegal. Or are not so uniformly, from state to state. Which may be one reason why across state line transactions are so popular. International mortgage servicing is the wave of the future. If Marcy in Wisconsin had such a rough time with New Centurion and Liftoff Mortgage when they were based in California and Texas, imagine the potential should their servicing operations be shifted to say, India. As many subprime providers are now in the process of doing.

The financial institutions that serviced Marcy's mortgage, and by and large, the ones excoriated by so many disillusioned homeowners on so many websites, are not store front operations, but prominent players in the subprime market. Though some have predatory reps, many are also connected to, or subsidiaries of, massive banking conglomerates. As was the one that sent Marcy, in the middle of a Wisconsin Winter, hurrying to sign papers at a truck stop 200 miles from her hometown. So that she could "get the right financing".

Carola Von Hoffmannstahl-Solomonoff

Next up-- On The QT Special Features: Truckstop Lenders & Waterfront HUD Hauls, Part Two. New Jersey Gold Coast Developers: Unlike Marcy, they know how to play the game. Plus an alternate reality vision of HUDless revitalization and a cross country roundup of some recent killer diller real estate frauds. A few million here, a few billion there-- pretty soon we'll be talking real taxpayer money!

*Subprime loans are most typically given people with weak credit histories. Though debt problems or delinquency can be involved, it can also be a matter of an insufficient income in relation to the size of the loan, or no home ownership history. Subprime loans, as opposed to prime loans, mean higher interest rates and extra fees for the borrower. Mortgages, home equity loans and debt consolidation are common applications of subprime lending.