Anatomy of a foreclosure, Part 2: How an adjustable rate mortgage led to crisis
Part 2 of 3- This article first appeared in the St. Louis Beacon: September 25, 2008- The collapse of some of the nation's oldest financial institutions started on Main Street America with hundreds and thousands of homeowners such as 56-year-old Maureen McKenzie of Kirkwood who in May lost to foreclosure the small ranch house that had been in her family since it was built after World War II. How could this happen? The answer is ... complicated. The Beacon will unravel the story of how Maureen McKenzie of Kirkwood, Mo., lost her 900 square feet of the American Dream.
Maureen McKenzie's father could tell she was nervous as he watched KETC-Channel 9's "Facing the Mortgage Crisis" program that aired on July 15, but he was impressed that his daughter had stepped forward and disclosed her personal experience with foreclosure.
"I don't think I could have done that,'' William Burns said.
Burns, 83, said he did what he could to help his daughter save the home he bought in 1953 on Barry Court in Kirkwood. At one point, he gave her $6,000 -- borrowed against her inheritance, he said -- so she could catch up on her mortgage payments.
"It's sad because it was Maureen's dream to own the family home we had for some 50 years,'' he said. "I was sad, too."
Burns remembers Maureen as a toddler, standing at the picture window in the living room. She was just 1 when he and his wife Josephine bought the brand new one-story frame ranch with a G.I. loan. They reared five children in the small three-bedroom home, making do in just 900 square feet of living space.
"We built a couple of bedrooms in the basement,'' Burns said.
Burns, who lives in a retirement community, has been following the foreclosure crisis and wishes there had been more help available for his daughter when she needed it.
"It makes me mad that the banks would pull the wool over buyers' eyes and put loans out there with those teaser rates,'' Burns said.
Oct. 16, 2005: "Welcome to First Magnus Financial! ... Payment due: $757.95''
First Magnus Financial Corporation introduced itself to McKenzie in a billing statement, dated Oct. 16, 2005, that included a friendly welcome. The note from the corporation, based in Tucson, Ariz., informed McKenzie that it had funded her new 40-year $184,500 mortgage. McKenzie signed the loan documents for what is classified as a "payment option adjustable rate mortgage" on Sept. 21, 2005.
McKenzie said that when she purchased her home from her father in March 2004, she had taken a 30-year conventional mortgage. Changing circumstances in her life had made the monthly payments of about $900 more than she could handle. McKenzie said she was financially strapped and dealing with chronic illness -- fibromyalgia -- that was impairing her ability to work.
McKenzie said a friend referred her to broker Kumar Sears, then vice president of HomeQ Mortgage of St. Louis. They met at a Kirkwood pizzeria to discuss her situation.
"He told me, 'I can help you. I can cut your payments,' '' McKenzie said.
She still has Sears' HomeQ Mortgage business card, which states: "30 Minute Approval, Debt Consolidation, 1.75% payment rate, 100% loans, No PMI, Low Credit Scores." (PMI stands for private mortgage insurance.)
The refinanced loan brokered by HomeQ took about a week to complete, McKenzie said. It included the payoff of McKenzie's previous mortgage, plus the disbursement of nearly $10,000 to her other creditors and a $5,000 payment to McKenzie.
"He offered that, and I said, 'Great, I need some money,' '' McKenzie said.
McKenzie, then employed by the Kirkwood Chamber of Commerce, said Sears brought her the final loan payments to sign at her office.
According to the settlement statement of McKenzie's loan documents, HomeQ was paid about $8,500 for arranging the loan: McKenzie paid an origination fee of $2,767.50 and a processing fee of $912. First Magnus Financial paid HomeQ $4,843.13 in a "yield split premium'' -- an incentive paid directly to brokers by lenders. McKenzie also paid a $595 commitment fee to First Magnus.
McKenzie's first payment to First Magnus Financial, due on Nov. 1, 2005, totaled $757.95: $583.28 for principal and interest and $174.67 for monthly impounds. That was about $150 less than the monthly payment of her previous conventional mortgage.
The statement also noted that the loan's introductory interest rate was 2.25 percent. McKenzie paid online, rounding the total due to $760.
Nov. 4, 2005: "Your interest rate will be changing"
On Nov. 4, three days after McKenzie made the first monthly payment on her new loan, First Magnus sent a letter notifying her that the loan's monthly interest rate was adjusting from 2.25 percent to 7.875 percent, as based on an index spelled out in her loan agreement.
The November monthly statement reflected the new rate: McKenzie's interest-only monthly payment was now $1,367.32 -- with the key words being "interest-only.'' Not one dime of that amount would go to the principal.
But because McKenzie's loan included a "minimum payment option," she was still only required to pay $757.95. The difference between this minimum payment and the greater amount needed to cover the full interest due on the loan would be added to the principal balance of the loan.
"I was just shocked,'' McKenzie said. "I understood that the interest rate would adjust, but I didn't understand that there would be such a gap between the minimum payment and the interest-only payment. It was a shock that my principal was now going to increase that much."
Sears insists that he explained to McKenzie how the "option ARM" would work.
"She was very specific about what her requests were and the type of loan that she requested,'' Sears said. "And, believe me, I am very confident because I handled Ms. McKenzie personally that she was extremely well informed on what she was doing, why she was doing it and what she was requesting.''
On Dec. 9, another letter from First Magnus brought what would become a steady interest rate increase in McKenzie's loan -- this time to 8 percent. The Dec. 15 statement stated that her interest-only payment was now $1,430.76, but the minimum payment remained $757.97. McKenzie's principal balance had grown to $184,867.93.
In January 2006, Chevy Chase Bank informed McKenzie that it would take over as servicer of her loan, which it did on March 1, 2006. As the loan's interest rate continued to fluctuate, so also did the amount of the loan's interest-only payment. What didn't change was the minimum monthly payment McKenzie had to make -- $757.95. With each passing month, her debt deepened.
But McKenzie's loan also contained what might be described as a "ticking clock" provision: Once the balance exceeded $202,950, the minimum payment option would cease, and she would be required to make monthly payments that fully amortized the loan for the remaining loan term. That occurred on Aug. 30, 2007, when Chevy Chase informed McKenzie that she had exceeded the loan's maximum "negative amortization principal balance cap." Her new minimum monthly loan payment was doubled -- to $1,610.70.
McKenzie said she desperately wanted to keep her home, but she knew there was no way she could make a $1,610.70 payment. Unable to continue working, she had gone on disability, and she was struggling to pay even the $757.97.
"I was nervous every month"
In a conventional mortgage, the monthly payment is more than the interest charged on the principal. This means that each month, the principal amount owed -- and the interest -- decreases.
In an interest-only mortgage, the monthly payment equals the interest charged on the principal. After a predetermined period of time, the monthly payment rises to begin paying off the principal. This means that each month, the principal amount owed -- and the interest -- stays the same. When the loan readjusts, the payments will rise to reflect the shorter term.
In a payment-option mortgage, the monthly payment can be lower than the interest charged on the principal, until the mortgage readjusts. After a predetermined period of time, the monthly payment rises to begin paying off the principal. This means that each month, the principal amount owed -- and the interest -- will increase, because the unpaid interest is added to the principal. When the loan readjusts, the payments will rise to reflect both the shorter term and the higher principal.
Although troubled homeowners are advised to talk to their lenders when they realize they might be in trouble, McKenzie said that Chevy Chase would not work with her to avoid foreclosure.
"The truth is, if you call your bank, it doesn't mean they'll work with you,'' McKenzie said. "I cannot tell you how rude this woman (at the bank) was to me. I asked her, 'What can I do?' Her response was, 'Pay off the arrears.' ''
McKenzie began contacting Realtors about selling her house. She hoped to find an investor who would buy her home and then lease it to her.
"I felt trapped. I just prayed that I could find someone to buy my house,'' she said.
McKenzie said she understood that her loan had an adjustable rate, but she believed that she had at least three years before her minimum monthly payment would rise -- time to get back on her feet and refinance into a better-rate mortgage.
"I was nervous every month when I saw the principal going up,'' McKenzie said.
Ironically, First Magnus Financial Corporation had also fallen on hard times. The same month Chevy Chase delivered the news to McKenzie that her monthly payment had doubled, First Magnus closed its doors in Tucson and filed for bankruptcy. The company laid off 5,500 employees around the country, most of whom didn't get their final paychecks, according to the Arizona Daily Star.
HomeQ has also been out of business for several years, Sears said. When contacted by the Beacon, he said he clearly remembers McKenzie.
"Maureen is very nice. I went out to her work, met her at her work. I mean, I catered to her in every way that I possibly could,'' Sears said. "But she was very clear about the financial strain that she was having. Believe me, we do a loan like that, I do a loan like that, I explain that you're on a five-year ARM, but you're on the clock.''
Sears said that McKenzie told him she needed to cut her payments.
"As a broker I just listened to what Maureen's needs were when she told me what she needed,'' he said. "And, believe me, I explained the difference to her between your fixed-rate loans, what your interest-only loans are, what the difference in a negative amortization type of loan is and which were going to provide the most relief for her and what type of timeline.''
Sears said he met with McKenzie again after her mortgage payments doubled to see if he could "get her out of the loan.'' He recalls that she had medical and credit issues, in addition to her mortgage troubles.
"Once again, it's tough -- a tough industry and a tough market that we're in. Believe me, the last thing in the world I would ever do is something malicious to somebody,'' Sears said. "It's tough for someone to necessarily understand what you're describing and what you're saying to them when all they're hearing necessarily is that, 'Man, I'm going to save $300 a month and I'm going to save it now.' ''
Sears said he realizes that everyone is looking for someone to blame for the state of the housing market.
"And you know what, I see in a lot of places where business is done in extremely unethical ways, but I can assure you that's not how Maureen McKenzie was handled,'' he said.
McKenzie, however, remembers her conversations with Sears differently. She insists that the broker told her that if she made the minimum payment, she would have at least three years before that payment amount would reset -- at which time she could refinance. And, she said, Sears never cited specific numbers.
"You know, these people do this all the time, and, so, it makes me wonder. I've talked to bankers and brokers before, and sometimes the way that they talk, they just ramble through things, and maybe to them they think they're explaining things, but it's much more complex to someone like me,'' McKenzie said. "So his idea of explaining things may be very different. And sometimes I think that they do that purposefully."
Facing a minimum payment of more than $1,600 a month, McKenzie said she knew she needed help, but she didn't know where to find it.
"I felt like I was on my own, in the dark,'' she said.
McKenzie said she heard about a workshop for troubled homeowners sponsored by the Neighborhood Assistance Corporation of America, a nonprofit community advocacy and HUD-certified counseling agency. She attended a November session and then contacted a NACA counselor for assistance. McKenzie said her case was delayed when that counselor left the St. Louis office of the agency, but in February it was taken up by Patrick Quigley, the counselor for NACA's Homesave program.
Quigley was incensed by the terms of McKenzie's loan, which he said "were all working against her."
"Her mortgage was going up, and her income decreased,'' he said. "Who on earth would look at Maureen's situation -- financially and otherwise -- and put her in a negatively amortizing loan? Even if she called them and asked them to do it. That is absurd. And she said, 'Well, I kind of understand what I was getting into, but I really needed the payment because the disability had cut my income so much.' But nobody wants to be put into a mortgage that's going to put them into the hole."
McKenzie spelled out her need for assistance in a "hardship letter" requested by NACA:
"In 2005, I had a serious medical condition for which I was hospitalized,'' she wrote. "Months later, I had still not fully recovered and felt I was getting weaker and weaker as I was trying to hold down a job. I finally had to quit my job and go on disability. Due to decreased income and medical expenses my financial situation became more and more difficult. I sought to sell my house at that time and/or refinance my house, neither of which I was able to do. I got behind on my mortgage payments and was threatened with foreclosure. I then borrowed money from my father to catch up with my mortgage payments. Then my mortgage payments went up along with the threat that they would soon double. In August, the engine in my car blew and I had to purchase a new car. This set me back another couple of months. Meanwhile, the mortgage payment did double, and I can not afford this amount."
Also in February, McKenzie was notified by South and Associates, a Kansas City law firm that specializes in foreclosures, that on March 6, 2008, her home would be sold in a trustee's sale at the St. Louis County Courthouse. In the meantime, Quigley said, NACA filed a loan restructuring proposal on McKenzie's behalf with Chevy Chase. But the bank did not respond to the proposal.
"At one point, she couldn't tell if her house had been auctioned off. She was in what we call "a dead zone" -- where the lender doesn't respond,'' Quigley said.
"The bottom line is that lenders do not have any legal obligation, and the lender decided they were not willing to work with us. It's very sad because Maureen is one of countless people where the only reason that her home was foreclosed on was because the lender was not willing to work with her.''
Quigley said he feels bad for homeowners who seek help but lose their homes anyway.
"Just getting past the embarrassment and shame of being behind on your mortgage, and then to come out and ask for help. To do the work, and then still not get help. That's tragic,'' Quigley said.
McKenzie says it was a frantic time, and even as NACA was working on the loan modification proposal she continued trying to find a Plan B. She said she was networking with everyone she knew, hoping to find someone who would buy the home she so loved -- and lease it back to her.
It was "a very expensive loan"
Attorney Diane Thompson of Godfrey who works of counsel to the National Consumer Law Center based in Boston reviewed McKenzie's loan documents at the request of the Beacon. She said that McKenzie's payment option ARM is not a typical sub-prime loan but considered an alternative prime loan.
"It's clearly a very expensive loan, and it's a loan that is designed in such a way so that anyone who takes it out is going to underestimate both the cost and the risk of taking it out," she said.
Unlike sub-prime loans that tended to be aimed at borrowers with risky credit ratings, alternative prime loans were typically made to borrowers with reasonable credit. These loans have lower interest rates than sub-prime loans but floating payment structures that, in the majority of cases, force borrowers to either refinance or face foreclosure.
"These loans are sold based on an artificially low initial interest rate,'' Thompson said. "In this case, the initial rate was 2.25 and most of the loan origination documents of Ms. McKenzie highlight that initial rate of 2.25. The catch is that this loan after a short initial period was going to adjust upward no later than November 2005. She entered into it Sept. 21, so the initial rate was only in effect for about a month and a week and after that point the rate was going to up and would likely be adjustable and varying all the time,'' Thompson said.
"What is deceptive, is that the payment rates are fixed at a lower rate of 2.25 when, in fact, after the first month her payment was insufficient to even cover the interest. After the first month, with every payment she is falling farther and farther behind.
Thompson noted that HomeQ Mortgage was paid about $8,500 in broker fees for McKenzie's loan.
"Something in the neighborhood of $2,000 to $3,000 is all that's necessary to compensate a broker for services,'' she said.
McKenzie paid a loan origination fee of $2,767.50 and a processing fee of $912. In addition, First Magnus Financial paid HomeQ $4,843.13 in what is called a "yield split premium.''
"Typically that means the lender is paying the broker for selling the borrower a loan at a higher interest rate than the borrower was otherwise eligible for,'' Thompson said.
"The broker was well paid even before they got this additional payment from the lender,'' she said.
"I was talking to everybody,'' McKenzie said.
She was also getting phone calls, emails and letters from solicitors offering to provide foreclosure assistance. At one point, she said, a Realtor just showed up on her doorstep.
"You don't know who they are,'' she said.
As a last resort, McKenzie was considering a short sale of her home. In a short sale, a lender agrees to accept the proceeds of the sale of a home, even though it is less than the value of the loan. McKenzie would lose the house but keep a foreclosure off her credit record.
At one point, she said, an acquaintance put her in touch with a potential buyer from Michigan who requested a home inspection. The buyer eventually declined to buy her home, but McKenzie says it was through that home inspector that she was given the name of a man she feels misrepresented himself and, ultimately, prevented her from avoiding foreclosure.
McKenzie says it is one more lesson that other troubled homeowners might learn from.
McKenzie has kept documentation of her dealings with a man who contacted her by email on Jan. 20, 2008, and introduced himself as Kevie Hendrix, "a client manager with Hendrix Realty, LLC, a professional investment company where we specialize in assisting clients with buying, selling, and managing real estate.''
McKenzie said she met with the man who identified himself as Hendrix and said he had a network of investors. She told him she dearly wanted to find an investor who would buy her home and lease it back to her, and he also offered to negotiate the terms of a short sale with Chevy Chase Bank on her behalf.
McKenzie acknowledges that she did not check whether Hendrix Realty LLC was licensed. A search by the Beacon has found no business named Hendrix Realty LLC registered with the state of Missouri.
McKenzie said the man did, in fact, negotiate with her bank, and she has copies of faxes and letters from Chevy Chase Bank to Kevie Hendrix regarding a short sale of her property, in which the bank apparently agreed to accept a sales price of $140,000, which was about $60,000 less than what McKenzie owed on the loan at that point. The bank also agreed to a maximum real estate commission of $1,000.
McKenzie said that between January and April, the man had her sign a series of "contracts for sale and purchase" in which Kevie Hendrix was listed as the buyer of her home, at prices ranging from $130,000 to $149,000. She said he did not buy her home, she never saw any advertising for her home, and to her knowledge few, if any, prospective buyers ever attended several open houses he arranged at her house.
Attorney Diane Thompson of Godfrey who works of counsel to the National Consumer Law Center based in Boston reviewed the documents at the request of the Beacon. She said it appears to have been an attempt at flipping McKenzie's home for a profit, above the $1,000 commission agreed to by the bank.
"He was making a contract to buy it from her, but only if he could sell it for more later,'' Thompson said. "It didn't look the way short sales have usually happened. It wasn't standard procedure.''
McKenzie said that while she doesn't believe that Hendrix Realty LLC made any money from its dealings with her, she feels her signed contracts with Hendrix cost her the opportunity to switch to a different Realtor after she lost faith in his ability to find a buyer for her home.
The Beacon visited a business on Cherokee Street in St. Louis that matches the address of the buyer, Kevie Hendrix, listed on the contracts. When asked about Hendrix Realty LLC, a man who identified himself as Kevie Hendrix, responded, "Now, when you say Hendrix Reality, that's actually not a business, you know?" The man denied knowing Maureen McKenzie. He acknowledged that it was his business address on the home sales contracts, but he denied any knowledge of them. At one point, he said he had gotten a few phone calls asking about Hendrix Realty, but he denied knowing anything about the business.
Despite frantic last-minute attempts by McKenzie to convince Chevy Chase to give her more time, her foreclosure was scheduled for May 8, 2008. She moved out of her home on May 3, five days before the bank foreclosed.