Michael Short/California Watch Oscar Trejo lives in this San Jose home. Heritage Pacific Financial sued Trejo to keep a bankruptcy judge from erasing an $88,000 second-mortgage note against a house Trejo lost through foreclosure in 2008. Trejo won, but the firm has appealed.
To understand Rick Jurgens’ article on the second-mortgage debt and one Texas firm’s aggressive collection methods, you must first look at the origins of the mortgage crisis. Here, we provide an explainer, a glossary of terms, a guide to available resources and a recommended reading list.
Explainer: The mortgage crisis
Five years after the housing bubble burst in 2007, the mortgage crisis appears far from over. More than 250,000 Californians have received notices of default in the last year, on top of the nearly800,000 Californians who lost their homes to foreclosure since the crisis began.
The mortgage crisis, which contributed to the steep decline of the state and national economies, is rooted in poor lending decisions by both borrowers and banks. Lending institutions and borrowers entered mortgage agreements counting on a housing market many believed would never stop expanding. But the overheated market turned cold. Too many homeowners found themselves committed to mortgages they could not afford and were unable to refinance or manage their adjustable interest rates once changes set in. As a result, nearly 1.5 million Californians defaulted on their mortgages, and foreclosures became rampant.
What is subprime lending?
Not everyone has good credit. Not everyone has a high-paying job. When banks loan money to these borrowers for cars, houses or other large purchases, the practice is called subprime lending. Because the loans are riskier, they often come with higher interest rates or interest rates that adjust over time – mostly up.
Many of these mortgage agreements were poorly constructed. Down payments were low – making it easy for borrowers to accept loans without much money in the bank. Many adjustable interest rates were designed to skyrocket after a short grace period. There view process for loans was minimal.
These subprime loans, specifically those with adjustable interest rates, contributed greatly to the crisis. Once housing prices began to fall and the economy tanked, new homeowners found themselves unable to sell their homes or refinance.
Why did housing values decline so quickly?
The simplest answer is supply and demand. As housing prices hit new highs between 2005 and 2006, construction of new homes was booming as well – to the point where the number of available homes was soon higher than the number of people willing and able to buy them, even with subprime lending. As homes went into foreclosure and lending institutions sought to sell them, the market was further saturated, and prices dropped even lower.
Mortgage: A large-sum loan, usually from a bank, for the purpose of purchasing property. The property itself is used as collateral.
Promissory note: Legal document guaranteeing payment of money by a certain date. Promissory notes are signed when mortgages are taken out, promising unconditionally that the principal value of the loan plus interest will be repaid in specific intervals over a given period of time and naming the borrower as personally responsible for this repayment.
Mortgage fraud: The intentional botching of mortgage paperwork to obtain a larger loan – or any loan at all – that would not have been granted had the lender known the truth.
Default: Persistent failure to repay a loan – either principal or interest – according to the agreed-upon schedule.
Foreclosure: Seizure and sale of a property when a homeowner cannot make payments on his or her mortgage or deed of trust.
Deed of trust: A legal document giving a third-party trustee the ability to quickly initiate foreclosure on a property once a borrower has defaulted on a loan. Colloquially, the term often is used interchangeably with mortgage.
Second mortgage: Arrangement similar to the original mortgage, but riskier for the lender and more expensive for the borrower. A second mortgage is made while the original loan is still in place. In the case of foreclosure, payments are made toward the second loan only when the first mortgage has been paid off. This usually translates to higher interest rates on the loan for the homeowner.
Deficiency judgment: Court order granting a lending institution the right to claim a borrower’s other assets– cars and jewelry, for example– if a foreclosure sale does not earn enough money to repay the original loan. However, most mortgages in California are “non-recourse loans,” which do not allow for deficiency judgments.
Debt collection: Once a borrower has defaulted on a loan, the lending agency usually will sell that account to a debt-collection agency. That account is often sold at a fraction of its face value. The collection agency can then sell that debt again to another institution, or work to get the borrower to repay the loan. The federal Fair Debt Collection Practices Act establishes consumer rights and appropriate conduct required of debt collectors.
Debt-collection lawsuit: If loans remain unpaid, debt-collection agencies often sue borrowers to get them to pay.
Default judgment: A court judgment issued in favor of a plaintiff when defendants fail to appear in court or respond to a court summons.
Bankruptcy: A legal evaluation of a borrower’s assets and a determination of how much outstanding debt can be paid off in exchange for the remainder of the debt being forgiven.
Discharge: Official order removing a borrower from responsibility to repay the full amount of loan following bankruptcy proceedings.
- "The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis" by Michael W. Hudson
- "Broke, USA: From Pawnshops to Poverty, Inc. – How the Working Poor Became Big Business" by Gary Rivlin
- "The Debt Machine: How the Collection Industry Hounds Consumers and Overwhelms Courts" [PDF] by the National Consumer Law Center
- "The Debt Buying Industry: A White Paper" [PDF] by DBA International
- National Association of Consumer Advocates: Find a private attorney who handles debt-collection or foreclosure cases.
- LawHelpCA.org: This website provides a searchable directory of legal aid providers, including Housing and Economic Rights Advocates in Oakland and the Public Law Center in Santa Ana.
- DBA International and the Association of Credit and Collection Professionals provide debt buyers’ or collectors’ perspectives on their respective sites.