From 35th Street to Wall Street: Anatomy of a foreclosureby Dan Olson, Minnesota Public Radio,
Sasha Aslanian, Minnesota Public Radio
Tomorrow, a Minneapolis woman is scheduled to lose her home. The bank says it's foreclosing on Faith Burns because she's fallen behind on her monthly payments. Burns says that's not so.
The fallout from the mortgage meltdown is vast. One-fourth of this country's home mortgages are risky subprime loans. About one-fifth of the subprime borrowers are having problems making payments.
In Minneapolis last year, there were 2,895 foreclosures. Already this year, that number stands at 678. We wanted to understand the meltdown through a smaller lens, so we traced the path of Faith Burns' mortgage. It leads all the way to Wall Street.
Minneapolis — We meet Faith Burns at her home in the Lyndale neighborhood of south Minneapolis.
Her one and a half-story house was built in 1904, and a real estate agent might brag about its hardwood floors and original woodwork. Burns lives here with her children, two teens and one adult.
She bought the property 13 years ago from Project for Pride in Living, a nonprofit group that helps low-income people become homeowners. Burns paid $31,500 for it.
Home ownership gave her a roof over her head and a way to build wealth for her family. It's a critical rung on America's ladder of opportunity.
"We just painted the kitchen. We actually painted the whole house," said Burns. "We have not gotten to the basement yet, but that's where I actually did most of my business."
Ironically, Burns ran a business which boarded up abandoned properties.
"So we would get phone calls from the police 24 hours a day, telling us they were putting someone out and we'd have to go board it."
Now, Burns hopes that won't happen to her own house.
Burns says her troubles began when her clients were late in paying her. She owed money to the IRS, and a bank had turned her down for a business loan.
"So what was the next thing that you could do and still run your business? That was the thing, your home," said Burns. "A lot of minorities have homes, so they did the refi."
The refi is a refinance. She could get cash out of her home to pay bills. In 2004, home values were soaring. Burns says she was getting calls and offers to refinance all the time.
"I actually was introduced to a gentleman who said he could get a refi for me, and that was it at the time," Burns said.
THE COLD CALLER
The gentleman's name is Louis Belfrey. He's the first stop along the way in Faith Burns' mortgage money trail.
Louis Belfrey was a "cold caller," contacting one person after another with his pitch. He hit a hot lead with Faith Burns -- not once, but twice. Burns refinanced through him in 2004, and again in 2005.
We found Belfrey living in a townhouse in New Hope.
"I worked as a cold caller years ago," said Belfrey, "like telemarketing, you know. Calling people and seeing if they wanted to buy a home, or finance a home or something like that."
Belfrey says he's out of the mortgage cold calling business, and paints houses now.
When Faith Burns gave us Belfrey's name, we made repeated calls that went unreturned. We visited his previous residences.
When we found Belfrey in New Hope, he was surprised, even wary, but willing to talk for a few minutes.
He says he didn't make much money as a cold caller -- only $200 for each customer he turned over.
"The ones making the money was like the brokers," Belfrey said, "maybe three, four thousand dollars, something like that."
In fact, the documents show Faith Burns paid far more than $4,000 to refinance her house.
Louis Belfrey turned Faith Burns' name over to the second player in her mortgage money trail -- a man he says is called Rocky.
THE NEXT STEP -- ROCKY FOSTER
Rocky is Reginald "Rocky" Foster. He wasn't home on a visit to his house in Apple Valley, and phone calls to him went unreturned.
Rocky Foster owned a mortgage company called Unlimited Funding Corp. The office was in Bloomington. But it's empty now.
"They had this whole space. As you can see, it's being redecorated now," said Tim Eide, the building owner who rented space to Unlimited Funding from 2003 until earlier this year.
Eide remembers Rocky Foster as a likeable fellow, the life of a party.
"He's a salesman. I think car sales in particular is his calling in life. I liked Rocky, and really was hoping he'd make it," said Eide.
Unlimited Funding was one of quite a few mortgage companies renting space from Eide in the boom times a few years ago.
"Even at the time, I was really nervous about some of the mortgage companies," said Eide. "They just didn't feel good to me. But we were so desperate."
Eide felt Unlimited Funding was one of the better companies. Rocky Foster kept current on his rent, and Eide heard about satisfied customers, like the manager at the nearby Taco Bell.
"I could see the niche they had in the minority mortgage market that had sometimes been overlooked by others," said Eide.
There's no way to know how profitable the business was, but Faith Burns paid a very large fee -- more than $13,500 on a $199,000 mortgage. The fees totalled nearly 7 percent, which was legal at the time. Now Minnesota caps mortgage fees at 5 percent.
Unlimited Funding's business dried up when the bottom fell out of the subprime market last year.
When we eventually reached Foster by phone at his home, he said he had gone back to the auto sales business and did not have time to schedule an interview.
Unlimited Funding Corp. wasn't a bank. It drummed up customers, helped them fill out a mortgage application and turned it over to a bigger company.
Burns' mortgage went to California-based BNC, the next stop on the mortgage money trail.
THE FIRST LENDER -- BNC
BNC wasn't a bank either. But it had an important connection to underwrite, or find the money, for Faith Burns' refinancing.
"BNC was a wholesale subprime mortgage lender, and they were a national lender," said John Rossi, who was BNC's regional sales manager, based in Chicago, beginning in 2006.
BNC doesn't exist any longer, but Rossi was willing to tell us how BNC's wholesale mortgage business worked.
His sales people would cold-call local mortgage companies like Unlimited to get them to sell BNC's mortgages.
"An account executive in the heyday, whether it be for BNC or any of those mortgage companies at that time, were making six figures," said Rossi.
The sales people were making lots of money because business, Rossi says, was very good.
"People wanted loans," he said. "Values for houses were appreciating, and there was a need to fill in terms of the secondary market and Wall Street, so business was very good."
Secondary market is a piece of financial jargon that means investors buying and selling among themselves.
BNC had a pipeline to Wall Street.
THE WALL STREET CONNECTION
The company was a wholly owned subsidiary of the venerable Wall Street investment banking firm Lehman Brothers. Lehman Brothers backed BNC's mortgages.
Lehman Brothers' money came from investors --banks, insurance companies, money management companies and others.
Lehman attracted the investors by pooling Faith Burns' mortgage with billions of dollars of other mortgages, then sold pieces of the pool to investors who wanted to make money off rising real estate values.
Investors loved the returns they were getting, and more investors wanted in.
Lehman Brothers and other investment banking companies tried to meet the demand. John Rossi insists they did that without compromising their standards.
"Nobody ever underwrote or funded a loan that we ever thought was going to go bad," said Rossi. "If we felt a loan wasn't going to perform, we just didn't do that loan."
However, BNC's sole business of selling subprime mortgages was risky by definition, because many subprime borrowers had troubled credit histories.
Faith Burns says she didn't even know the word "subprime" until she heard it on TV a year ago. She also says she didn't know her loan had an adjustable interest rate.
When rates ticked up, many borrowers were squeezed. Enough of BNC's subprime loans went bad that the company closed its doors in 2007, two years after Faith Burns refinanced with them.
Twelve hundred BNC employees, including John Rossi, lost their jobs. Rossi says no one came out whole from the ordeal. He's philosophical about his own loss.
"What I went through is nothing compared to some of the customers out there that are trying to make their mortgage payments," Rossi said.
BNC was gone, but Faith Burns' mortgage was still alive on Wall Street. Lehman had pooled it -- adding it into a large fund with lots of other mortgages.
Lehman Brothers didn't return calls to say who the investors are, and it's not public information.
TRAIL GOES COLD
And that's where Faith Burns' mortgage money trail goes cold.
It's not easy to find who's holding the bag if Burns defaults on her loan. We called someone on Wall Street who manages money to see if he'd know what happened to Burns' mortgage.
"One analogy you can use is that of a butcher," said Todd Petzel, chief investment officer for Offit Capital Advisers. He had nothing to do with Faith Burns' mortgage.
In fact, five years ago, Petzel says, he warned his investors about the risks of buying into deals like this. Petzel explains why the money trail has gone cold.
"The pig goes to the butcher shop and it gets chopped up into different pieces. Some people like the ham, and some people like the loin, and some people like the sausage -- and it all gets packaged up and sold to different folks," said Petzel. "Why your trail has run cold is that once the mortgages are chopped up into all these different pieces, it's hard to put the pig back together again."
It's likely that different investors own different parts of Burns' mortgage, and they all want to be paid.
So that's the money trail of Faith Burns' refinanced mortgage on her south Minneapolis home -- from 35th Street to Wall Street.
From the small-time New Hope cold caller to Unlimited Funding Corp., now belly up in Bloomington, to the now-defunct BNC in Irvine, Calif., to Lehman Brothers in New York City, to investors everywhere.
CHASE PICKS UP FAITH'S MORTGAGE
All this time, Faith Burns' financial problems were growing. She closed up her business of boarding abandoned properties and took a lower paying job through a temp agency.
Her monthly mortgage payments of $1,435 were going to a new player in her financial life.
If you're keeping count, the fifth stop is Chase Home Finance, a subsidiary of J.P. Morgan Chase, another Wall Street investment bank.
Chase was the bookkeeper now in charge of collecting Burns' monthly payments for Lehman Brothers' investors.
Burns' history with Chase was not smooth. She fell behind on payments in 2005 and went into foreclosure, but she managed to catch up.
In 2007, Chase told her she was behind on her payments again. But that didn't square with Burns' own records.
She pulls out boxes of statements and spreads them out on the dining room table of her south Minneapolis house.
"They were very confusing. They were showing more than what was owed," said Burns. "I called them to see, can I get a correction on the statement, and they said that's just the statement they sent out and to ignore the statement."
LAWYER GETS INVOLVED
Then she went to see a lawyer -- Mark Ireland, an attorney with the Foreclosure Relief Law Project.
Ireland is a former assistant Minnesota attorney general. By his own description, he's a geek when it comes to the inner workings of the mortgage meltdown.
Faith Burns was referred to Ireland when she went to see a mortgage foreclosure counselor at Twin Cities Habitat for Humanity. Her home had been auctioned at a sheriff's sale in November 2007.
Minnesota gives homeowners six months to get caught up before the foreclosure is finalized. She has until May 6, 2008.
Attorney Mark Ireland says he saw problems with how Burns had been treated.
"Faith is just a very smart woman, and she's soft-spoken," said Ireland. "She is illustrative of the people who are in the foreclosure crisis right now."
Ireland says Burns isn't looking for a bailout, she just wants to be treated fairly.
"Shortly before she was foreclosed upon, she had thousands and thousands of dollars returned to her because they didn't want to slow down the foreclosure," Ireland said.
Ireland says by his calculations, Burns was actually two months *ahead* on her payments.
Burns asked Chase to send her a record of her account. They sent her a printout designed to be read by bankers and accountants.
The printout contains columns denoting principal and interest. But adding to the confusion is a column called "suspense accounts."
Chase says it does not accept partial payments. But Chase also says it creates suspense accounts to store partial payments, until there's enough to make a full payment.
Attorney Mark Ireland calls the document gibberish.
"You can't really figure out how this money was applied, where it went," Ireland said. "And you'd think that if this was going to be her official record from Chase Home Finance, that anybody should be able to look at this and understand it. I can't, and certainly Faith can't."
'A DEFECTIVE MORTGAGE'
Ireland saw other problems along the way on Burns' mortgage money trail.
He says she paid extremely high fees for her refinancing back when the whole process started three years ago.
"I think the broker made $12,000 or $14,000 on this deal. I don't know how long brokers spend originating these loans, but I think that's a very, very good hourly rate," said Ireland.
The fees swelled the total of what Faith Burns owes well beyond the value of her home.
She now owes $209,000 on a house that, according to city of Minneapolis property tax records, was never worth more than $191,000. For tax purposes next year, the city says the value of the house has declined to $174,500.
Ireland says Burns was sold a defective mortgage. He alleges that key players failed to disclose the terms of the mortgage, violated truth in lending laws and used incorrect numbers in calculating her costs.
He's filed a federal lawsuit on Burns' behalf, naming Chase and others all the way back to the BNC mortgage.
So, where did all the money Faith Burns took away from three refinancings go? Some, she says, was used to consolidate and pay off consumer credit card debt. However, she says most of the money went to back her business. Faith Burns' business of boarding up abandoned houses went like this: she'd get a contract, then borrow short term to buy materials with the intention of paying off the short term debt when the client paid up. Some of the bigger jobs also required hiring a helper or two so there were employee expenses as well.
The troubles began, Burns' says, with late paying clients. She resorted to using the cash from the refinancings to pay her business expenses - paying off the debt, paying the workers, and last, paying herself - when the clients were late. Burns' strategy of tapping the equity in her home to back her business is common, but it's fraught with risk and Faith Burns admits she was not as attentive as she should have been to keeping track of the details.
Chase Home Finance, the company collecting Burns' monthly payment, declined to speak on the record about the specifics of her foreclosure.
Chase spokesman Tom Kelly, based in Chicago, says Chase's job is to serve the investors, and putting people out of their homes is a last resort.
"Our goal, whenever possible, is to keep people in their homes. It just makes sense," said Kelly. "As a servicer and representing investors, the investor doesn't want the house, they want the loan to be repaid."
Kelly says Chase is renegotiating the terms of home mortgages where borrowers are in trouble.
"We have modified or refinanced $4 billion of subprime adjustable rate mortgages, and we have another $3 billion in the pipeline," said Kelly.
Chase's efforts come too late for Faith Burns.
Tom Kelly says Chase's policy, once foreclosure has begun, does not include renegotiating a mortgage.
Burns' attorney Mark Ireland argues Chase has the power to renegotiate. Ireland compares the troubled mortgages held by Chase and other companies, to cars that are lemons and need to be fixed.
"They're the designated mechanic for the car," Ireland said. "It's true that they didn't design the car, but they're the ones that get paid every month to fix it."
Ireland wants Faith Burns' mortgage thrown out and rewritten.
There are other players in Faith Burns' mortgage problems.
One is Minneapolis-based U.S. Bank, which watches over the finances of the trust on behalf of the investors. U.S. Bank says it can't do anything for Burns since it's just the trustee, and declined to be interviewed.
WINNERS AND LOSERS
There are clear winners and losers in Faith Burns' mortgage money trail.
The cold caller, Louis Belfrey, who first approached Faith Burns, lives in a rented townhouse his landlord gave back to the bank.
Unlimited Funding Corp., the company that wrote the mortgage, is out of business. Its owner, Rocky Foster is back in the auto sales business and says he's working 12-hour days to survive.
BNC, the company that underwrote the mortgage, is closed.
Its parent company, Lehman Brothers, took a write-down of billions of dollars for its subprime losses, and is being sued by unhappy investors.
Lehman Brothers isn't alone.
Lawsuits abound from investors, shareholders and other hurt in the mortgage meltdown.
Faith Burns and her three children have been told to be out of the house Tuesday, May 6, a development she calls the demolition of her American dream.
"What can we do? What should we be doing now as a homeowner?" said Burns. "I'm going to court ... even though they may not save my house, there's something we have to do. Who can be quiet? No one can be quiet at this time."
Many people in her plight are being quiet. As one expert after another told us, troubled homeowners are putting their heads in the sand, hoping their problems will go away.
Faith Burns says she initially blamed herself for the fix she's in. She should have pushed harder to understand what she was signing. Now she's decided to make noise.
Faith Burns' version of the American dream uses home ownership as the springboard for personal wealth, stability, the future. She wants her children to have a chance to go to college. The financial difficulties she's been encountering have already cut into those dreams.
Faith Burns doesn't know most of the people who played a role in her mortgage money trail. And they are unaware of her personal struggle to keep her home.
The outcome isn't clear. For Faith Burns, her neighbors, and neighborhoods everywhere, the effects of the mortgage foreclosure crisis continue to spread.
The latest information we have is that negotiations are underway to allow Faith Burns to stay in her house while the litigation is underway. That's according to her attorney, Mark Ireland.
(With assistance from editor Mike Edgerly; video editor Sam Choo; researcher Betsy Cole; audio engineer Craig Thorson; and production assistant Nancy Rosenbaum)
Dan Olson reports and produces Minnesota Sounds and Voices for MPR News.