Morales lost her small adobe house on Kroeger Lane, near downtown, for good when she was evicted this spring by the current owner, Deed & Note Traders of Tucson. But she began losing it nearly 25 years ago, when she signed a paper to secure a loan. It just took a long time for a combination of predatory-lending practices, real estate speculation and soaring home prices to finally move her out. The story of her loss is in many ways the story of the dark side of Arizona real estate during the last quarter-century.
"They told me a hundred dollars a month, and my house was safe," she recalls. "I was stupid to believe them."
Deeds, liens and conveyances belong to a world few of us really understand. As Karin Uhlich, executive director of the Southwest Center for Economic Integrity (and a City Council candidate) says, "Who knows what's tucked away in all that fine print?"
We are likely to misunderstand the very nature of the most important documents we sign. A mortgage, for example, is not a loan but a lien, "a conditional conveyance of property as security for the repayment of a loan." The holder of the mortgage owns the house--with certain conditions--until it is paid off, and under specified circumstances can foreclose and take the whole thing back. A deed of trust is slightly more complicated, because it involves three parties: a trustor (the borrower), a beneficiary (the lender) and a neutral third party as the trustee that holds the deed, usually a title company. It gives the trustee the power to foreclose on the pledged property without going to court if the trustor defaults on payments.
The contracts Morales signed--over the years, there were several--are not among the decades' worth of papers she has kept, but judging from what happened later, they were very advantageous for the lender. In short, the loans were predatory.
According to sources as varied as Freddie Mac and ACORN--the Association of Community Organizations for Reform Now--predatory or opportunistic lending is a huge and growing problem in Arizona and throughout the United States. It's not just that the terms of such loans are unfair, or that they're peddled to the poor; the worst thing about them is their intent. While it's counterintuitive to think that some lenders might want borrowers to default, in a low-interest, red-hot real estate market, it's a desirable outcome. (Clauses written into contracts forbidding early repayment of many predatory loans make it essentially impossible for victims to take advantage of the market themselves.) In most cases, the predatory lender's goal is not just to strip out the homeowner's equity through high interest and huge fees, but to acquire his property.
Unscrupulous lenders have a number of ways to strip away home equity, the only real wealth most of us will ever have. They charge higher interest rates than the borrower qualifies for, loan people more than they can afford to repay, charge unreasonably high fees or write in balloon payments that are not disclosed, fold in life-insurance policies of benefit only to themselves and talk borrowers into "flipping" (refinancing) loans for large, undisclosed fees. They often prey upon minorities, especially those who don't speak fluent English, and upon the poor and the elderly. According to the Arizona attorney general's cautionary booklet, they are also on the lookout for "those experiencing unexpected financial setbacks like divorce, medical expenses, loss of employment, death of spouse ... and natural disasters"--they identify likely targets by reading the obituaries and legal announcements. This is not an ethically attractive corner of the business world.
People who are cash-poor but equity-rich--like many older people--are favorite targets because of their combination of need and accumulated wealth. And once the borrower has signed a deed of trust, the loss of his home is often only a matter of time. The process works that much faster if he hits a patch of bad luck.
Many victims are too stunned or embarrassed to fight back, but Cecilia Campillo, 66, is, like Morales, an exception. She's become a vocal adversary of predatory lending since she discovered that she and her husband Abelardo, 76, were victims of it. She works for the Southwest Center for Economic Integrity, and was assigned to study up on predatory lending. As a result, she took the papers on a loan they had from Wells Fargo to a credit counselor, who found that it was high-interest and loaded with hidden fees and insurance payments. Mrs. Campillo started dogging the bank and ended up going all the way to the top. She told her story this May at a Wells Fargo stockholders' meeting in front of the bank's top officers. Wells Fargo recently repaid the Campillos for the overcharges.
"I told them that poor, hardworking people have dreams, too," says Mrs. Campillo, "and this is taking our dreams away. Cheating people like us may be legal, but it's not ethical. I'd even say it's sinful."
Ugly as they may be, the lenders' tactics are legal in Arizona, as long as they stop short of outright fraud. Attorney General Terry Goddard's office recently announced a suit against a "foreclosure rescue" company that charged desperate homeowners high fees for negotiating with their mortgage companies while doing nothing.
According to Andrea Esquer, Goddard's press secretary, he and his staff take a special interest in predatory lending and are eager to see more complaints filed. They are, however, severely hampered by Arizona's lax banking regulations. Recent efforts to get a strong regulatory bill passed have been so vigorously discouraged by the state's banking industry that, last time around, the state legislator who was going to introduce the legislation let the whole thing drop.
Many facts about Morales' financial position in the early 1980s, when her troubles started, are obscure. A past-due notice from Western Loan Services, which did the billing for Union Home Loan, shows that by August 1980, just three months after she took out the loan for $3,000, she was already missing payments. The following April, she signed a note for $9,000 made out to a man named Fred Koleno, and signed over a deed of trust with him as beneficiary the following year. In October 1982, Lawyers Title, the trustee, billed her $3,142.17 in "reinstatement charges," and by July 1984, Union--which was collecting for Koleno or vice versa--was threatening her with foreclosure unless she came up with $10,856, a figure that reflected an unpaid balance of $7,435 plus $3,421 in interest and fees.
Morales filed for bankruptcy in 1984. According to the filing, she also owed $377 in property taxes and $3,595 to what was then the University of Arizona Hospital. It was during these years that her lupus first appeared.
Through the mid-to-late-'80s, Morales faithfully made $210 monthly payments to Koleno, but in 1990, she filed for bankruptcy again, an action apparently triggered by Lawyers Title threatening to sell "the paper" on her 1982 promissory note. For that $3,000, she now owed $11,645. Union claimed $13,290.53, of which she admitted $6,000 in the settlement.
"What you see with this type of loan," says Rick Rhey, director of Southwest Fair Housing Council, "is the same thing that happens with payday loans. People can barely afford the interest, so they pay for years without ever being able to reduce the principal. People pay for their houses several times over and still lose them."
Somehow, Morales held on to the house through the second bankruptcy, from which she emerged still owing $12,000--including $800 to each of two lawyers, debts that were also secured by the house.
Ten years later, she would again face foreclosure.
This, at least, is true.
A 2004 study by the Southwest Fair Housing Council, "The American Dream Lost: Foreclosures in Pima County, Arizona," concluded that between 1995 and 2002, "Pima County experienced a dramatic increase in the number of home foreclosures, almost 150 percent." Significantly, the city of Tucson commissioned the study to specifically examine predatory lending, but researchers for SWFHC were unable to pry data out of the banking industry. They decided to use foreclosures, which are a matter of public record, as a proxy, much to the irritation of several banks that responded once the study was done.
The most common scam run by "rescue" lenders is making high-interest loans to threatened homeowners "in pre-foreclosure." These loans are for amounts that will cover the past-due payments, plus a large fee. In return, the homeowner signs over his house, usually with a deed of trust. He typically defaults quickly, since his monthly payment is now even larger than it was before, thus losing both his house and all of his equity. Another more brazen wrinkle is for the rescue lender to tell the borrower that it will make the mortgage payment for him, and then simply not do it. According to a number of consumer resources, an owner faced with foreclosure would be better off just letting it happen, or voluntarily "giving" the house to the mortgage holder, a strategy that won't save the house but will save his credit. People faced with losing their houses rarely think clearly, however, and many of them only get advice from those who stand to gain from their actions.
Another way to make a fortune off the unfortunate is by buying up tax-lien certificates. Pima County, like most jurisdictions, auctions off delinquent property taxes to investors in the form of liens on property. Investors bid the interest they are willing to accept, with the lowest bid winning, and then pay the county the amount owed. The investor cannot collect what he paid for several years. If the property owner pays the delinquent taxes in the meantime, the county pays the lien-holder back, plus interest. What the investor hopes, though, is that the property owner does not pay off the back taxes. Then, in the words of how-to Web site tax-lien-certificates.net, "You will have hit the lottery. The government will give you the deed to the underlying property, FREE-AND-CLEAR. Tax Certificates are senior to all other mortgages and liens (including Federal tax liens). This means you could realize a Return On Investment of 10,000 percent or higher." The certificate holder can now foreclose and become the property's new owner.
The trouble with all this vigorous capitalism is that, in the words of the Pima County study, "foreclosures are devastating to the well-being of families, neighborhoods and communities."
"There are some people who think foreclosures are a good thing, people trying to make a killing in real estate," says Rhey. "And many lenders don't see them as a bad thing, either. But for the families this happens to, it's a disaster. Their home is gone, and their credit is ruined. They'll almost certainly never own another home."
Shay Salomon, a former neighbor of Morales who is a board member of the Tucson Community Land Trust--a nonprofit that buys and holds land to keep property affordable--says that a house is much more than shelter.
"Your house is your kids' education, your retirement, your future. You lose it, and all that's gone."
Through the '90s, it appears that Morales paid her creditors monthly, but by 2000, when she was unable to work and on full disability, she owed Pima County $4,378 in back taxes. By state law, Pima County charges 16 percent interest on delinquent taxes and will only accept payment in full. This can be a serious obstacle to repayment for people who don't have much money. According to Morales, the county sold the tax certificate (or lien) to a company in Florida. Fred Koleno was now dead, and it appears that his heir exercised his right to foreclose.
Morales filed for bankruptcy once more, only to run into a classic Catch-22: You must have income to go bankrupt. Full disability does not count as an income.
On May 11, 2000, a Tucson company, Deed & Note Traders, won the deed of trust at auction for $33,000, and sent a form letter to Morales telling her to get out within five days, as was their legal right. The letter also said that if she was interested in renting the house, she should get in touch. A few days later, she began paying $500 per month, a discounted rate according to David Kinas, president of Deed & Note Traders. The rent went up to $575 in 2003. By the time she was evicted in April, her rent payments added up to roughly $30,000, almost covering Deed & Note's investment, less taxes and repairs.
This summer, after she moved out, the house went on the market for $95,000.
Deed & Note also builds and sells homes, brokers loans, manages leases and provides standard real estate services. According to Pima County records, Kinas and his wife, Deanne, Deed and Note Traders and Deed & Note Traders together own 162 properties around the Tucson area; according to Kinas' "Ask the Expert" column, he has bought and sold more than 700 properties in the last 12 years.
Deed & Note has a subdivision called Homesavers that offers foreclosure-prevention services, which they advertise through direct mail, on TV and on their Web site to homeowners in trouble. At the same time, the two Deed/Note entities and Kinas have filed for 784 evictions in Justice Court since 1993, an average of more than one per week. Last week, on Thursday, July 14, Deed & Note had five eviction cases in justice court. In one of those cases, the defendant has filed an answering complaint about Deed & Note.
When asked about the number of evictions, Kinas explains that they're "part of being a landlord and the no-qualifying expert in town.
"Our business has been built on helping low-income people buy homes and stay in their homes. Of course, that turns into more evictions than if we had a different business model."
Deed & Note also sells homes under a lease-to-own plan that, on the face of it, seems problematic. A recent ad, for instance, offers a three-bedroom, two-bath eastside home for $162,500 "for sale by owner," the owner being Deed & Note Traders. To move in, the prospective buyer need not qualify for a loan, but must make a $4,995 move-in cash down payment and monthly payments of $1,195. $125 of each month's rent goes toward buying the house, if it's paid on time. The catch is that the lease is for 18 months, and the renter has just that long "to secure conventional financing for the balance owed to Deed & Note Traders." The ad doesn't say what happens if the renter can't get a mortgage, but Kinas says that families that fail to qualify are always allowed to stay in the houses as renters, although their rent may go up "as market conditions change." He also says that at least 90 percent of families in the program successfully buy their homes.
Discussing this arrangement, Rick Rhey asks, "What are the odds that a family that can't get financing now will be able to get it 18 months from now? They'll end up having paid $5,000 up front for the privilege of paying rent and owning nothing."
There's also no indication on the advertisement that the $169,500 price is in any way guaranteed, but when asked, Kinas says that it is locked in.
"We set it at probably 5 to 10 percent above current market, which is a good deal the way things have been going. I predict the market will be up 15 to 20 percent in 18 months."
How do you protect naïve people from getting into deals that leave them with no equity and no house? Or deals that are just plain bad? It's common for buyers to come into poor neighborhoods offering a fraction of what the properties are really worth in cash. Homeowners are often so dazzled by the cash that they sell for much too little. It's an especially effective strategy with older people, according to Rhey.
"They tend to be out of touch with the market, and think in terms of what would have been a good deal 10 or 20 years ago," he says. "They tend to be trusting. And they often have big medical bills to pay."
What's needed to keep people from being victimized, he says, is more education for the public and an office that people can bring contracts to for free evaluation before they sign.
"Local governments and organizations have not stepped up on this issue, and they need to. A lot of people are getting hurt."
Why, if it's in such rundown shape, has the house appreciated so much? There's the boom in the Tucson market as a whole, of course, but that's compounded in this case by an even steeper price rise in downtown property. Kroeger Lane, which is the name of both a street and a tiny neighborhood across the river from Menlo Park, backs onto Rio Nuevo and is less than 100 yards from the site of future condos intended to sell for several hundred thousand dollars. With Rio Nuevo finally underway, gentrification is beginning in those nearby neighborhoods that have not already been taken over by lawyers' offices and bed-and-breakfasts.
Property taxes have nearly doubled in Kroeger Lane in the last five years, putting a strain on poor residents. Some tax relief is coming this October, according to Emily Nottingham, director of the city's Community Services Department, but it's only a rebate on the calculated difference between the average increase in property taxes within the city overall and the average increase in the vicinity of Rio Nuevo. That's probably not going to be a lot of help to people with low or fixed incomes.
Corky Poster, director of the Drachman Institute at the UA, characterizes Kroeger Lane as "the most vulnerable neighborhood in Tucson."
"Because of its low density, high proportion of vacant land, poverty and proximity to the UA and Rio Nuevo, it is extremely vulnerable as a functioning neighborhood," Poster says. "What I mean by that is that if you come back and look around in 20 years, Kroeger Lane is the neighborhood that's most likely to be unrecognizable. It's not inevitable, but I'd say it's likely."
Jennie Morales sits in the small house she's now renting, a house she was only able to get into because three friends gave her the money for the first and last month's rent. Her lupus has flared up, because of the stress of the eviction, she believes. She doesn't particularly like the new place, which is crowded with boxes still to be unpacked.
She still hopes to return to the house on Kroeger Lane.
"My father bought the land from Mr. Hayhurst for $500, and he'd come around collecting from everyone, $5 every week or month--I don't remember. You knew everyone. We'd help each other."
She shakes her head. "Mr. and Mrs. Ochoa across the street got thrown out, (as did) several others who always lived there. It's all new people now."
Morales' neighbors, working with Tucson Community Land Trust, have offered to buy the house at market value so that she can move back in. The trust would keep the house permanently affordable, and her son would be able to inherit it. As this issue of the Weekly went to press, Kinas called Salomon and opened negotiations.
But the questions raised by Morales' dispossession reach far beyond any single neighborhood.
Nigel Valdez, another Tucson Community Land Trust board member, asks, "What does it do to us when our family homes are perceived by the powers that be primarily as a financial instrument?
"And I think we need to ask whether we can have a healthy and sustainable community with an economy based on selling real estate to each other."
They're questions Tucson has not yet wanted to ask itself.