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Anatomy of a foreclosure, Part 3: Life in the aftermath.... now what?

Part 3 of 3 - This article first appeared in the St. Louis Beacon: September 26, 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.

 Nearly five months have passed since Maureen McKenzie moved out of her little white frame ranch on Barry Court in Kirkwood, and she is still trying to find her way through life-after-foreclosure.

The house that was in her family for more than half a century now sits empty with a For Sale sign out front, while McKenzie has just moved again into her second apartment since the foreclosure. Looking back, McKenzie says, she always held out hope that her circumstances would improve and she would be able to refinance into a better mortgage.

"Maybe I was just being stubborn,'' she said.

There is a lot of shame associated with foreclosure, McKenzie said, but she wants people to know that the mortgage crisis is not always about greed -- that not everyone who faces foreclosure is living a lavish lifestyle. By coming forward and telling her story, she knows she might risk the loss of friends and even some clients of a small bookkeeping business she runs.

McKenzie believes that if lenders had told her "no'' during her attempt at refinancing, she might have stayed with the conventional loan she started with and looked harder for other options.

"I would have tried to find a roommate, or I would have sold the house,'' she said.

And she can't help but question the government's recently announced bailouts of the banking industry.

"It's too late for me,'' McKenzie said. "It's frustrating. But I question the legitimacy of what they're doing. Are they just bailing out the bankers? Are they bailing out the homeowners?''

She said it would be odd to see the government bail out bankers who were complicit in creating the mortgage crisis if nothing is done for people who are losing their homes.

"The government has been slow to act for homeowners. If they do something to help homeowners and it is to late for me, at least they'll be doing something for people. But it will make me sad,'' McKenzie said.

That is a feeling echoed by Patrick Quigley, a housing counselor who worked with McKenzie through the St. Louis office of the Neighborhood Assistance Corporation of America, a nonprofit community advocacy and HUD-certified counseling agency.

"The bottom line is: The bailouts are inevitably on the shoulders of taxpayers. And many of these taxpayers are the very victims,'' Quigley said. "Is it absolutely and completely unfair? You betcha.''

This past summer, auditors for the U.S. Department of Housing and Urban Development accused the now-bankrupt First Magnus Financial Corp. -- the company that funded McKenzie's "option ARM" loan -- of violating federal law by giving incentives to some real estate companies, builders and brokers. In the meantime, former executives of First Magnus have started a new company called Stonewater Mortgage Corp. in the same building in Tucson, Ariz., according to the Arizona Daily Star.

Kumar Sears, who was vice president of the now-defunct HomeQ Mortgage of St. Louis, which brokered McKenzie's mortgage, said it was his job to let borrowers know about loan products that were available.

"You have to sign the documents. You have to read the documents. You have to understand what you're doing. I mean, I take 100 percent responsibility if I make a bad financial decision in my life,'' Sears said. "I reap the repercussions, and, unfortunately, I only have one person to blame -- that's myself.''

Sears said that brokers didn't design the alternative loan products, such as the "option ARM'' (Adjusted Rate Mortgage.)

"Washington Mutual, Lehman Brothers, Fannie Mae and Freddie Mac, these loans go right through there,'' Sears said. "I mean, once again, I understand times are ugly and everybody's looking for a direction to point a finger, but the First Magnuses and the HomeQs of the world wouldn't have that loan to sell to anybody -- it wouldn't be an option to our society to put themselves in a worse position in two or three years -- if our government and our lending institutions didn't send that stuff straight down to us.''

Sears said he now has a full-time job outside of the lending industry. 

Quigley predicts that pay-option ARMS, similar to the one McKenzie had, are going to be the buzz word for the next 12 months, because of the amount of them that were sold and will be coming due.

"Pay-option ARMS were usually attached to higher loan amounts,'' Quigley said. "Those loans are going to default like crazy. People who say, 'I'm already $40,000 or $50,000 in the hole, so I'm just going to let it go. Rent an apartment until I get going again. The losses are going to be significant. When people say it's going to get worse before it gets better, it's because of the pay-option ARMs and the rest of the alternative products of '05 and '06 vintage.''

In April, shortly before the foreclosure, McKenzie contacted Legal Services of Eastern Missouri for advice. Attorney Daniel Claggett reviewed her loan documents and encouraged her to file complaints with the Missouri Division of Finance and the Missouri Attorney General's office. "Loans such as yours are extremely confusing and arguably abusive and deceptive,'' he wrote. He also encouraged her to find an attorney who might be able to represent her.

McKenzie said she has contacted an attorney who is reviewing her situation.

Attorney Diane Thompson of Godfrey who works of counsel to the National Consumer Law Center based in Boston said that a foreclosure wipes out most claims against lenders and brokers. The claims that survive are not easy cases and few lawyers are comfortable bringing those kinds of claims.

"They are extremely time consuming and expensive cases to bring,'' she said.

Thompson said the lack of proper underwriting was responsible for a large percentage of failed loans.

"When you see mortgage foreclose at such high numbers, there are many factors contributing, but one of them was that these loans were never made on the basis that they thought people were going to be able to repay them. They were made on the expectation that housing values would continue to go up endlessly and that people would just serially finance their way out, so that people would be spending their equity to refinance. That would leave the lenders whole. By flipping loans from one to another, again and again, the lenders would keep making money regardless,'' Thompson said.

"When housing values stopped going up, it became hard to refinance. That business model no longer works for the lender. The result is that many people like Ms. McKenzie are losing their homes. And they can't refinance these homes and they have no equity left in these homes on which to base refinancing,'' she said.

Quigley said troubled homeowners are waiting to see what the bailouts might mean for them. He said that more lenders are working with borrowers on loan modifications than previously, but the success of many of those modifications is in doubt.

"The modification was basically a repayment plan. The bank said, 'You owe us $10,000, your mortgage was $700, so we're going to divide it over the next three years, so your new payment will be $1,200. Good luck with that. How is a person going to be able to pay that when they were already having problems paying $700? That's why these plans have failed,'' Quigley said.

Quigley is critical of the national hotline operated by the Homeownership Preservation Foundation and the HOPE NOW Alliance, an effort backed by the U.S. Department of Treasury and the U.S. Department of Housing and Urban Development that attempted to get lenders and nonprofit housing counselors to work together. The alliance was put together by the Bush administration after the collapse of the sub-prime loan market.

"It's because the government has -- No. 1 -- not regulated the results, and that's because they just sort of threw this together as a PR stunt,'' Quigley said. "It was a PR stunt. The Hope Now Alliance did not work fast enough. And it's still not working fast enough to be able to create affordable solutions for folks in at-risk situations with their mortgage lenders.''

Mary Delach Leonard is a veteran journalist who joined the St. Louis Beacon staff in April 2008 after a 17-year career at the St. Louis Post-Dispatch, where she was a reporter and an editor in the features section. Her work has been cited for awards by the Missouri Associated Press Managing Editors, the Missouri Press Association and the Illinois Press Association. In 2010, the Bar Association of Metropolitan St. Louis honored her with a Spirit of Justice Award in recognition of her work on the housing crisis. Leonard began her newspaper career at the Belleville News-Democrat after earning a degree in mass communications from Southern Illinois University-Edwardsville, where she now serves as an adjunct faculty member. She is partial to pomeranians and Cardinals.

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