Foreclosure battle leads Gilbert homeowner to tangled trail

Katherine Christensen was sitting in the kitchen of her Gilbert home when she opened a packet from a lender. She wasn't prepared for the sheet of paper slipped in among several other letters and documents inside.

A foreclosure notice.

Christensen knew she was in trouble with her house, but didn't think it had come to this.

She had bought the house with her husband in 1999 and completely renovated it, adding hardwood floors, faux-painted walls, a swimming pool in the back surrounded by palms and ficus trees. When the couple divorced in 2001, she kept the house and paid it off.

Then, in 2006, she did something that she now knows was a mistake. A loan officer encouraged her to put more than $530,000 into a high-return investment. He sent her to a mortgage firm next door to help her borrow money to close the deal. She took out a loan, most of her home's equity, and invested it in a Canadian mining company.

By 2008, the mining firm had filed for bankruptcy. Christensen hadn't recouped any of her investment.

She hadn't had a full-time job since she stopped renovating rental properties with her husband. She had a small monthly income, but the monthly payment on her adjustable-rate loan was $1,600.

Since then, she had been working with someone at her mortgage-servicing company, sending in $500 a month because she couldn't make the full payment.

Christensen thought she could work something out - reduce her payment, keep the house she planned to live in for the rest of her life, slowly pay back the money she owed. She was still hopeful the mining investment would return some of her money.

Then, in January 2009, she received the foreclosure notice. But something didn't seem right.

The amount she owed looked terribly wrong, tens of thousands of dollars more than she had taken out. And the firm trying to foreclose on her wasn't the same bank that had given her the loan.

"I was terrified. I didn't understand what was going on and how the firms listed in the packet were involved," she said. "I had no idea what to do to save my house."

Christensen thought about giving up. But first, she wanted answers. What was really happening with her loan?

The search for those answers would lead her on a two-year journey through the inner workings of the nation's mortgage system and the courts.

In the midst of the national foreclosure crisis, more and more borrowers are finding that the mortgages they now can't afford are filled with errors, fraud and hidden pitfalls they never knew about.

Sometimes they find they were misled or lied to by loan agents. Sometimes they find their lenders don't have the paperwork required to foreclose.

Many of those borrowers will lose their homes in spite of the errors. They can't make the payments anymore and don't have the funds to fight foreclosure.

But others, like Christensen, believe someone, somewhere, needs to correct the errors and fraud in their loan documents. They want to get their loans fixed, with payments they can afford. Or at the very least, they want to prove they were wronged.

A growing group of professionals is helping them try.

Starting that January, Christensen would seek three reviews known as forensic mortgage audits, which would help her peel away the layers of her loan to reveal what she now believes are illegal transactions and fraudulent loan practices that set her up for foreclosure as soon as she borrowed the money.

Forensic mortgage auditors pore over mortgage documents, title records and bank files. They go line-by-line looking for inaccuracies. They examine home loans that were sold to investors and help homeowners figure out where their payments really go.

With help from these investigators, some homeowners have been able to plead their cases in court, fix their loans, and keep their homes.

Foreclosure

For Christensen, the fight didn't start all at once.

She was stunned to be facing foreclosure, because she had just been trying to work out an agreement to make partial payments on her loan. But the people she earlier had talked to stopped returning phone calls, so she stopped sending them checks.

She connected with a network of other metro Phoenix homeowners facing foreclosure she heard about through friends and online searches. They met informally to help one another, offering information on the foreclosure process and sharing information from lenders.

Christensen started doing what she could to stop the process.

Her foreclosure packet gave her an address to write to if she wanted more information about her mortgage situation, so she wrote - again and again. Monthly registered letters got her no response.

In April 2009, she received a letter telling her a foreclosure auction was scheduled for July 2. She tried to sue to stop it, but her case was thrown out.

The house went to auction on the courthouse steps in Maricopa County, but no one bid the $600,000 that was owed.

Soon another company was trying to foreclose, and it sent a sheriff's deputy to evict her. Christensen told him she was fighting the eviction and persuaded him to let her stay in the home.

Then she filed for bankruptcy. The move put her foreclosure into the courts and bought her more time.

In fall 2009, she went to a conference on foreclosure research in Southern California. It was there that she first heard about forensic mortgage auditors. Finally, she thought, somebody could help her find answers. She went home and sold some furniture to pay for the conference and to hire an auditor.

The loan

For about $1,500, Ohio-based Foreclosure Defense Group looked at hundreds of pages of Christensen's loan documents.

The group's auditors looked at the forms she signed when she sought the loan, the information her lender gave her about her payments, the disclosures about fees.

This is typically the first thing forensic auditors do. They're looking for violations of the Real Estate Settlement Procedures Act, RESPA, a consumer-protection law requiring that borrowers receive specific types of information before signing loan documents.

In Christensen's case, they found a laundry list of problems.

One of her loan documents showed her interest rate set at 2 percent for 10 years, but a second document listed her interest rate at 8.1 percent; disclosure of the fees on her loan, almost $9,000, was filed a week after Christensen signed her paperwork. Christensen said she had never seen that document and had been told the fees would be much less.

Christensen's income was listed as $14,880 a month on the loan documents. She said she provided her loan officer 2005 tax documents that showed her earnings were less than $500 a month.

The audit also questioned the appraisal for Christensen's home, saying it was potentially inflated.

"I am not a loan expert, but I did look through my documents before I signed," she said. "There are figures I saw for the first time after this audit. And there were signatures that weren't mine."

The audit proved for Christensen that she had been misled about what her adjustable interest rate would be, and had been charged fees without being told of them. She still wasn't certain why her loan amount had grown.

She believed she had been given a loan that was bound to end up in foreclosure.

Mortgage experts and homeowner advocates now believe countless borrowers were roped into mortgages they couldn't afford because of fraud in their mortgage applications. Loan officers or their employees may have illegally falsified income to get a borrower a bigger mortgage.

Christensen felt vindicated - she had proof that her loan was flawed. But her fight was far from over.

She had secured her original loan from Tucson-based First Magnus. That lender failed, and its assets were liquidated through bankruptcy in early 2008. Christensen didn't know what became of her loan after that.

She had heard from a string of other firms. Chevy Chase Bank of Washington, D.C., sent her the foreclosure letter. Cal-Western Reconveyance Corp. of California had scheduled the auction. Aurora Loan Services of Colorado had tried to evict her.

Knowing she had gotten a bad loan wasn't going to help her if she didn't know who she was trying to fight.

She needed to know who these firms were, and who really was in line to take her house.

The title

Christensen filed her auditor's findings as part of her bankruptcy case. Then she had a nervous breakdown.

She lost weight, gained weight, battled insomnia and lost clumps of hair, she said, as she worried about losing her home.

"I would spend hours reading documents I didn't understand," she said.

She needed help.

Christensen talked to nearly 50 metro Phoenix attorneys, and finally found one, Dan McCauley, who was willing to take her case pro bono.

"What lenders have done to homeowners like Katherine is criminal," he said.

She and McCauley then hired Phoenix mortgage auditor JD Deal of National Litigation Support Services to research the Maricopa County records on her home.

Deal, who worked for a large lender before becoming an auditor, has done more than 200 mortgage audits for Phoenix-area homeowners facing foreclosure. One of his specialties is title research, figuring out who, under the law, is legally in line to own a property. Such research shows just how much has changed from the days of traditional mortgages handled by hometown bankers.

Local property records show who holds "title." In Arizona, most lenders hold title to a home until the mortgage is paid off. A deed-of-trust document is filed declaring title, or rights of ownership.

Before the 1990s, most lenders kept the copies of their own deed-of-trust documents. By the mid-1990s, more lenders began selling mortgages. When Christensen obtained her loan, most lenders were packaging home loans and reselling them as securities, like bonds, on the open market.

A security could contain thousands of mortgages, and it proved too difficult to update records at county records offices nationwide each time that security was bought and sold.

A company called Mortgage Electronic Registration Systems, or MERS, began electronically storing loan documents for most big lenders. MERS works as a clearinghouse, keeping track of who owns U.S. mortgages and who has the right to "service" them, collecting the payments.

Most lenders don't actually have copies of title and mortgage documents anymore. And now in many cases, county title records no longer show who is entitled to receive a home as collateral.

For $300, Deal spent five to 10 hours researching all of the public property records on Christensen's Gilbert home.

He looked at her original deed-of-trust documents. He checked for liens and changes to her home's title. Several documents were missing and others were missing information or filed incorrectly.

"I found multiple errors in her title," Deal said. "Arizona's land laws are very straightforward, and when lenders start assigning different rights to a property's title as part of a mortgage, they have to follow the laws."

It was obvious from Deal's audit that it wasn't clear who held title to Christensen's home.

For her, the finding was ammunition. She would be able to argue in court that lenders hadn't followed the rules in laying claim to her house.

But it was hardly a solution.

She still owed someone a great deal of money. She couldn't stop a foreclosure - correct the problems with her mortgage, or get a judge to do it - until she knew who really owned her mortgage.

"How can I negotiate a payment I can afford or even make the right payment," she said, "if I don't know that information?"

To find an answer, she and her lawyer turned to another auditor who wasn't really an auditor at all.

The mortgage

Daniel Edstrom doesn't have a background in mortgages, real estate or law. He's a Southern California computer engineer who in 2008 spent a year researching Securities and Exchange Commission documents and other public financial filings to figure out who owned the mortgage on his home.

With Wall Street bundling and reselling mortgages, an individual investor or trust in New York or Russia or Asia might own a mortgage on a home in metro Phoenix and pay another firm to collect the payments. If the purchase of the loan isn't handled by a publicly traded entity or tied to a government agency, the homeowner may never know who really owns the mortgage.

Edstrom tracked his own loan "to reverse engineer what Wall Street did to mortgages," he said.

He began researching Christensen's case in August.

MERS shows Deutsche Bank National Trust as the trustee for her home loan.

Edstrom found Christensen's loan number in documents recorded by Deutsche and traced it back to its origin to then figure out where it is now. It's a confusing trail to follow.

After initiating the loan, First Magnus transferred it to Residential Funding Corp., which then moved the loan to Residential Accredit Loans. Investment banker Lehman Brothers acquired the loan and bundled it with other adjustable-rate mortgages in a fund that was sold to investors. Aurora was a subsidiary of Lehman, which filed for bankruptcy in 2008.

Edstrom found Christensen's loan was one of almost 4,000 mortgages sold to investors through what Lehman called its RALI Series 2006-08 Trust. Documents filed with the Securities and Exchange Commission showed that Deutsche Bank is now the trustee for the investment trust. And at the end of the paper trail, Wells Fargo & Co. is named as the "custodian" of the loan, but what that means is not clear. There's no obvious link to Chevy Chase or Cal-Western.

Through the transfers and sales of Christensen's mortgage, Edstrom discovered missing documents and signatures that were needed to legally reassign the deed.

His audit untangled the history of who owns her mortgage, information to help with her court battle.

The dilemma

Over the summer, Christensen kept up the fight for her home. But she was low on energy and out of money.

She drained her pool and stopped watering the backyard. The grass died, and her ficus trees wilted.

Her air-conditioner and heater broke then, too. She doesn't have the money to replace them. As summer turned to fall, then winter, she put on extra sweaters and started opening up the windows and garage during the warmest part of the day.

For observers of the nation's housing meltdown and for critics of banks that receive government help but drag their feet to help struggling homeowners, it's easy to see borrowers like Christensen as crusaders. They are victims, wronged by banks that are now trying to steal their homes.

But for many, people like Christensen present a moral dilemma that's at the heart of the national real-estate debacle.

While they may have been wronged, they borrowed money, and they still owe money. For a judge to let them keep their homes for free would seem unfair to countless other borrowers who still pay their mortgages every month.

For critics who say the housing crisis was fueled as much by personal greed as by financial misdeeds, it would be easy to see Christensen as a guilty party.

After her first foreclosure notice in January 2009, Christensen stopped making mortgage payments altogether. She has lived in her home for nearly two years without paying.

Christensen acknowledges all of that. She wishes she hadn't taken the loan. She followed bad financial advice.

But she says her case shows just how catastrophic a bad loan can become.

First Magnus, her original lender, was gone. The loan officer who sold her on the Canadian mining investment wasn't licensed. His office closed, and Christensen couldn't find him.

She doesn't believe it's fair for some unknown group to take her home unfairly or illegally.

Now, she is working part time from home but doesn't want to start paying again if someone is just going to take the house away.

Christensen and other crusaders say their fight is about righting wrongs. Rather than walking away, they want to change the terms of their loans, fix the items on which they were misled and hang on to their homes.

"I am not trying to get my house for free," she said. "That has never been my intent. There were problems with my loan, including outright fraud. I just want it fixed and for the lenders, investment banks and servicers to take responsibility for their wrongs."

Every review has gotten her another filing for her court case, and, she feels, a step closer to a solution.

But the lenders and loan servicers are moving forward, too.

Last month, a sheriff's deputy knocked on her door with yet another eviction notice. It was the fifth time he had been there.

"I asked him what he was doing there," said Christensen. "I had a court hearing the day before, and none of the attorneys from the other side showed up, so the judge continued it."

She showed the deputy the court paperwork, and he gave her a few days to file for an emergency hearing to stop the eviction. The judge granted her the extension.

The future

Last week, Christensen was in court again. McCauley submitted the new findings from the mortgage audit. The federal court judge agreed there are too many questions unanswered in the history of her loan and foreclosure proceedings to kick her out of the house. So she will be there for the holidays.

Another court date is scheduled for Jan. 20, when both she and Aurora Loan can present their cases. The judge stayed her eviction until then.

She's had her boxes packed for months, awaiting an eviction, but is feeling more optimistic of late. Last month, she and her attorney met with an investigator with the Arizona Attorney General's Office about her investment, the loan officer and First Magnus, which gives Christensen more hope.

Next month marks two years since she received her foreclosure notice.

Along the way, Christensen has become a grass-roots activist. A good friend of hers just had a foreclosure case overturned in court. She follows cases from other states, using the information to help herself and others.

"I'll be in the house for the holidays. I might even unpack a box or two," said Christensen. "It's been a nightmare, but I feel good I didn't give up. I hope others will join the fight."

by Catherine Reagor The Arizona Republic Dec. 19, 2010 12:00 AM





Foreclosure battle leads Gilbert homeowner to tangled trail