May 31, 2012

Homeowners with foreclosed second mortgages targeted by Texas firm

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 the banks foreclosed on their houses. Others said they signed applications that had been prepared by brokers.

Rather than shy away from seemingly worthless second-mortgage notes, Heritage Pacific has spent millions of dollars to assemble an inventory of at least 40,000 second-mortgage notes, according 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 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.

Kennedy 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."

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.

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. Heritage Pacific also has filed 226 cases in federal bankruptcy courts in California.

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."


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