Adding new uncertainty in the state's ongoing mortgage crisis, a Texas company is aggressively pursuing hundreds of Californians to collect second-mortgage debt -- on homes they've already lost through foreclosure.
Many of these former homeowners believed their mortgage debt had been erased after their houses were taken by banks and lending companies. But the Texas company, Heritage Pacific Financial, has aggressively pursued collections and filed lawsuits claiming those debts still linger.
For Ahmed Abdelfattah of San Jose, debt collectors started calling in 2009, saying he owed Heritage Pacific $135,000. He said he'd never heard of the company before.
"It's been a nightmare," Abdelfattah said. "It's cost me money and time, and they ruined my credit until now."
Oscar Trejo said his first encounter came a few days before he expected to exit bankruptcy and get a fresh financial start. That was in November 2010, he said. Heritage Pacific sent Trejo, who also lives in San Jose, a letter saying it had asked a bankruptcy judge not to discharge, or erase, its $88,800 claim against him.
Trejo invested in properties in Merced and later lost them all in foreclosures. But he hadn't done business with Heritage Pacific. "I had never seen the company's name," he said.
Heritage Pacific was started by identical twin brothers, Chris and Ben Ganter, who once starred in a reality TV show, "PayDirt," about investing in the Dallas-Fort Worth real estate market.
The company's lawsuits often accuse defendants of misstating their incomes on loan applications. While many borrowers did overstate their incomes on applications, consumer attorneys say Heritage Pacific is targeting people who filled out their forms honestly or whose mortgage brokers pumped up their applications without their knowledge.
Critics of Heritage Pacific say the company's central tactic is forcing settlements from people who can't afford a drawn-out legal fight and who don't know the details of California law. The company has sued people with second-mortgage debts of less than $150,000, despite a state law prohibiting lawsuits alleging fraud on mortgages below that amount.
Heritage Pacific's collection methods now face legal challenges, including a class-action lawsuit in Santa Clara County Superior Court that contends that the company is carrying out an "insidious and illegal debt collection scheme."
The company doesn't make mortgage loans, but instead attempts to collect payments on loans originated by others. Heritage Pacific launched its effort in late 2008 when it began buying at a steep discount second-mortgage loans that borrowers had stopped paying. Many of the loans were secured by houses that already had been sold in foreclosure by first-mortgage lenders.
By demanding payments from more than 1,000 individuals in California, the lawsuit contends, Heritage Pacific has violated "the rights of those who have already suffered the emotional and financial distress that results from the loss of their foreclosed home."
Heritage Pacific is nothing more than "people in Texas acting as vultures," said Will Kennedy, a lawyer in the class-action suit.
In an answer to the lawsuit, Heritage Pacific says it's not suing "innocent home-owners who, through no fault of their own, lost their homes." Instead, the company says it targets defendants who "made material misrepresentations to secure large loans upon which they soon stopped paying."
Fraud claims "are the only ones we're interested in pursuing," Chris Ganter, the company's chief executive and main owner, said in an interview.
But some former homeowners now threatened with legal action by Heritage Pacific dispute these claims. They told California Watch that the income they claimed on their mortgage applications was valid, and they stopped paying because they lost their jobs, their income plummeted and banks foreclosed on their houses. Others said they signed applications that had been prepared by brokers.
Heritage Pacific had no trouble finding plenty of so-called non-performing second mortgages for sale. During the recent real estate boom, an estimated 25 percent of house buyers took on a second mortgage rather than make a down payment, according to a 2007 Federal Reserve study.
A giant foreclosure wave swept hundreds of thousands of Californians from their homes. They often left behind second-mortgage loans that looked uncollectible and worthless.
While lenders can sell foreclosed properties and keep the proceeds, in California theycan't pursue borrowers if the sale falls short of the amount owed. Foreclosure also takes away most of the legal tools for creditors to seek payments on second mortgages.
That's where Heritage Pacific has stepped in.
Rather than shy away from seemingly worthless second-mortgage notes, Heritage Pacific spent millions of dollars to assemble an inventory of at least 40,000 second-mortgage notes, according to interviews with company executives and deposition testimony.
Fraud accusations against former homeowners became Heritage Pacific's tactic for restoring value to its second-mortgage notes. California law gives a lender that can prove that a borrower fraudulently obtained a loan for more than $150,000 the right to sue. A creditor also may allege fraud to prevent a debt from being erased in bankruptcy.
Abdelfattah, a 52-year-old naturalized American who was born in Egypt, said it wasn't fraud, but a steep drop in his income as a sales manager at a local Honda dealership, that caused him to fall behind on his monthly house payments of $5,000.
In 2008, the holder of his first mortgage foreclosed on the three-bedroom, 1,170-square-foot Santa Clara house that he had purchased in 2005 for $675,000.
But to his chagrin, Abdelfattah found that foreclosure didn't end his house-related financial woes. As the summer of 2009 faded, he started getting collection calls from two or three individuals representing Heritage Pacific. They wanted him to pay a portion of the $135,000 balance they said he still owed on the second-mortgage loan he had used in his house purchase.
The callers were "really annoying," Abdelfattah said. One was "really aggressive, cursing on the phone." They accused him of never having lived in the house. They sent him a letter asking him to verify his income, and another titled, "Demand for Payment of Outstanding Debt."
In May 2010, Heritage Pacific named Abdelfattah in a lawsuit that claimed that he had used fraud to obtain a second mortgage. But on March 19, a Santa Clara County Superior Court judge threw out the company's claim against Abdelfattah because the alleged fraud had involved a loan for less than $150,000.
Abdelfattah, who wants to buy a house, was only somewhat relieved: "They are not able to sue me, but (Heritage Pacific's claim) still affects my credit." Abdelfattah's countersuit alleging violations of debt-collection law by Heritage Pacific is scheduled for a jury trial in July.
Heritage Pacific declined to comment on the details of Abdelfattah's or other individual cases, but said, "Any court rulings against Heritage Pacific Financial will be appealed to the California Court of Appeals as soon as it is possible to do so."
Heritage Pacific can ignore the prohibition on pursuing fraud claims related to loans for less than $150,000 because it still can get default judgments and out-of-court settlements from some defendants, said Kennedy, the attorney in the civil action.
As a practical matter, he added, "the law only applies to people who are in a position to defend themselves."
Heritage Pacific's website portrays the company as a friend to its collection targets. It says the company wants to help foreclosed homeowners "begin again and regain financial independence without the baggage of old liens or bad credit history."
The home page also features a link to a proclamation of the company's intent to seek "justice against those who have perpetrated, conspired, and participated in the mortgage fraud (that) plagues our nation and our nation's economy."
Ganter said Heritage Pacific is pursuing appraisers and loan officers with its fraud claims. But while two lawsuits in Santa Clara County name appraisers as defendants, in dozens of Heritage Pacific second-mortgage lawsuits reviewed by California Watch, the defendants were homebuyers whom Heritage Pacific accused of overstating their incomes on loan applications.
Even Kennedy, the lawyer pursuing the class-action lawsuit against Heritage Pacific, acknowledged that the company is probably "able to find inflated incomes without too much problem, on a lot of them (but) not all of them."
But that's only part of the story, Kennedy stressed: "The banks knew exactly what was going on."
Kennedy isn't alone in identifying lenders and their agents as key drivers in mortgage market abuses.
Subprime loans were "often aggressively sold to consumers by profit-seeking lenders rather than sought out by consumers," according to a report by the U.S. Government Accountability Office. And the U.S. Housing and Urban Development Department's report on the root causes of the foreclosure crisis found that "most fraud is driven by mortgage brokers in their efforts to earn profits by originating loans."
In California, aggressive lending helped inflate a housing bubble that more than tripled average house prices in the decade that ended in 2006. From 2000 through 2007, lenders originated nearly 3.3 million subprime mortgages in the state, according to the GAO.
But then the bubble burst, sending average house prices in the state down 46 percent since 2006. By March 2009, more than half of the 1.4 million subprime mortgages in California were delinquent, defaulted or foreclosed, according to GAO. By March 2012, about 835,000 homes in the state had been lost in foreclosure, according to DataQuick, which compiles real estate data.
Falling house prices and souring loans ravaged homeowners, lenders, and the housing and mortgage market in California and nationally. Among those hit by the slump was Ganter, a homebuilder who built 200 town homes in Texas suburbs and planned to build another 60.
In 2010, Ganter briefly sought bankruptcy protection for his Paydirt Real Estate Investment Trust, which listed a $6,300 rental deposit as its only asset and $572,000 in unpaid bills. Ganter said the bankruptcy did not involve Heritage Pacific and was later dropped.
Even as his real estate enterprise foundered, Ganter used money from investors to begin assembling a portfolio of second-mortgage loans. In depositions, a company executive put the total face value of the company's claims in a range from $1.5 billion to $2 billion. To cash in on those assets, Heritage Pacific began pursuing collections from hundreds of foreclosed homeowners.
Lydia Pina was one. In 2009, Heritage Pacific's collectors began pushing her to pay up on a second mortgage she took out in 2007, when she bought a house in Gilroy for $675,000. She lost the house in foreclosure 14 months later.
The collectors were willing to deal, according to Pina's sworn declaration. If she would pay $29,000, they would settle their $139,000 claim. If not, they would garnishee her wages.
In May 2010, a process server came to Pina's workplace. When the receptionist called Pina, she said she was late for a meeting and asked that he come back later. Instead, he left a summons with the receptionist. And that's how Pina learned that she was being sued for $139,000.
That lawsuit remains pending in Santa Clara County Superior Court. Through her attorney, Pina declined to comment.
Ganter said he couldn't comment on pending litigation, but said Heritage Pacific generally uses a "nice-guy strategy" to pursue collections.
In practice, the company's collection methods don't differ much from those used by debt buyers and collectors who search out and demand payments from borrowers on charged-off credit card accounts, student loans or medical bills.
Heritage Pacific first sends a form letter to a borrower, then follows up with at least 20 collection letters or telephone calls, according to depositions by a company executive and an attorney.
In a presentation to investors, the company said it typically offers to settle with borrowers who repay 20 percent of their outstanding balance.
Heritage Pacific's first big foray into California came in U.S. District Court in Los Angeles, where in a three-month period beginning in December 2009, Heritage Pacific filed three lawsuits seeking $46 million in actual and punitive damages from 158 defendants who took out 143 loans.
That push yielded mixed results. One judge signed 21 default judgments ordering no-show defendants to pay $1.8 million. But a lawyer who showed up to represent one of the defendants persuaded another judge to shut down the company's multi-party lawsuits. The defendants had "nothing in common other than that they each applied for and received a loan that Heritage now owns," the judge wrote.
Meanwhile, Heritage Pacific opened another front in California state courts. California Watch reviewed online records in 10 of the state's 17 largest counties and found 365 lawsuits in which Heritage Pacific was a party.
A counterclaim filed in one of those lawsuits became a class action that seeks to keep Heritage Pacific from filing new fraud claims. The class action claims that the company goes to court "based upon a high statistical probability that the foreclosed homeowner lacks the resources to defend the lawsuit."
When defendants fail to show up, courts can issue default judgments that affirm the validity of debts and allow creditors to seize debtors' paychecks or property.
In a deposition, a Heritage Pacific lawyer estimated that 60 to 70 percent of the defendants in its lawsuits default, and the company has obtained about 200 default judgments.
But Ganter said default judgments aren't very valuable. Heritage Pacific found itself paying $20,000 to $30,000 for "a piece of paper that says somebody owes you money."
Heritage Pacific also has filed more than 220 cases in federal bankruptcy courts in California, including the claim against Trejo. Heritage Pacific contended that he had overstated his monthly income, but a judge ruled that while Trejo didn't make $9,500 a month as he stated, the lender had "ignored obvious problems" with Trejo's loan application and couldn't block the discharge of his $88,800 debt.
Heritage Pacific has appealed that ruling to a Bankruptcy Appellate Panel, arguing that the lender's reliance on Trejo's undocumented assertions reflected "the custom and habit of the mortgage industry at the time."
In the meantime, regulators in Arkansas have cracked down on Heritage Pacific's fundraising. The Arkansas Securities Department found that in September 2010, four Arkansas investors paid $50,000 each to buy bundles of second mortgages from Heritage Pacific, and the buyers signed separate deals to pay Heritage Pacific to collect and distribute payments from their mortgages.
In December 2011, the securities department issued a cease-and-desist order directing Heritage Pacific to stop selling unregistered securities.
Ganter said that Heritage Pacific had not agreed to a settlement and that the case was "not finished up."
Campbell McLaurin, an attorney for the Arkansas Securities Department, said he believed that his state was "not unique as far as (Heritage Pacific) seeking investors."
In a deposition, a Heritage Pacific executive said the company had spent $20 million to $25 million buying second-mortgage notes, and the source of its funds was a "guarded secret, for sure."
A contract disclosed in a lawsuit shows that in one instance, Heritage Pacific raised $500,000 from a company incorporated in Alaska but controlled by Guy C. Alexander III, an Orange County homebuilder.
"I can't comment on our individual partners," Ganter said. Alexander did not respond to phone messages left at his office.
Consumer lawyers hope that rulings in Trejo's case and two other bankruptcy appeals, as well as the class-action lawsuit, will put a stop to Heritage Pacific's collection campaign in California. The company hopes the outcome in those cases will leave it with the tools to make its second-mortgage loans profitable.
Meanwhile, as hundreds of lawsuits work their way through state and federal courts in California, it seems unlikely that the battles between foreclosed California homeowners and Heritage Pacific over millions of dollars of soured mortgage loans will end anytime soon.
Story by Rick Jurgens California Watch