You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

One Stop, Many Problems

Sitting in her lawyer's office at South Brooklyn Legal Services, her hands folded calmly in her lap, Sandra Barkley describes how she became the first person in her family to buy a home. The 52-year old single mother begins by speaking in a relaxed southern drawl, but as she comes to recount her experiences more fully, her voice rises, and her cool breaks.

In the winter of 2002-2003, an acquaintance of Barkley's put her in touch with United Homes, a New York City-based company that specialized in fixing up and reselling homes purchased at foreclosure auctions and distress sales. (Later, Barkley learned that her acquaintance had received $1,000 for the referral.) United Homes--whose slogan is "We Make Dreams Come True"--simplified the process of buying a home for first-time homebuyers like her by being a "one-stop shop," where customers could obtain the services of a real estate broker, mortgage broker, appraiser, and attorney all under one roof. A 2008 New York State Commission of Investigation report on the subprime mortgage crisis reported that there were 40 such shops in one New York minority neighborhood alone.

Barkley, who at the time made around $28,000 a year working for the New York City Housing Authority, wasn't sure whether she'd have enough money to buy a home when she first walked in the door at United Homes. She says that she voiced her concerns to a United Homes salesman, and later to a lawyer the company found for her--but both men assured her that she'd be fine. Still, Barkley's apprehensions grew, and she became so nervous about the deal that she attempted to postpone the closing until she could obtain independent legal advice. A United Homes employee, she claims, told her that she could not change the date. Unsettled by the flurry of paperwork at her closing, Barkley stayed up all night reading the documents, and the next day sent letters and made phone calls to her lawyer, Olympia Mortgage, and United Homes in what proved to be an unsuccessful effort to cancel the mortgages she had signed. And so, less than two weeks after being shown a $359,000, three-storey, white vinyl sided house on a tree-lined street in the Bedford-Stuyvesant neighborhood of Brooklyn, Barkley closed on the property with a $10,000 down payment.

Turns out, though, that Barkley had reason to worry all along. The Olympia Mortgage Corporation, which worked with United Homes on some of its deals, approved Barkley for two no-income no-asset mortgages based on an appraisal that valued the house at its $359,000 sales price. But that number was arrived at by someone who, at the time, was under suspension from doing appraisals on federally insured mortgages by the United States Department of Housing and Urban Development (HUD). Later, after a woman passing on the street asked how much she paid for the house and implied that she had overpaid, Barkley commissioned her own appraisal, which valued it at $260,000. A subsequent appraisal by Barkley's new lawyers valued Barkley's house at its time of purchase at $235,000. In addition, unbeknownst to Barkley, United Homes had purchased the house for $153,000 at a foreclosure auction only three months before selling it to her.

According to court papers filed by Barkley's lawyers, Wall Street investment banks were also involved. Before Barkley had even closed on her house, Olympia Mortgage completed the necessary paperwork to sell her mortgages, which were designed to meet underwriting guidelines on a website maintained by the investment bank Credit Suisse. A Credit Suisse subsidiary, DLJ Mortgage Capital, purchased the loans only a month after Barkley closed on her house, despite the fact that an automated review of Barkley's mortgages stated that they were "high risk" and that her house had been over-appraised by more than $120,000. After being sold to another Credit Suisse subsidiary, Barkley's two mortgages were then separately bundled into mortgage-backed securities (which today are under the trusteeship of JP Morgan Chase and Fannie Mae), and shares were sold to investors.

Meanwhile, the house was hers, and her financial situation was slipping. She was unable to afford her mortgage payments and faced the possibility of losing her house to foreclosure--a fate that could severely compromise Barkley's prospects of buying another house, renting, or even finding a new job. And she is just one of countless first-time homeowners--many, like her, African-American--who now face uncertain financial futures as a result of experiences with one-stop shops. "It was worse than my worst nightmare," she said, tears streaming down her face. "My words to myself were, 'How could you be so stupid? How could you be so trusting? How could you be so naive?'"

Barkley is a plaintiff in one of six ongoing lawsuits that charge United Homes with being at the center of vast and far-ranging conspiracies--involving appraisers, lenders, lawyers, and major financial institutions--to defraud low-income homebuyers. (This past May, after a five-year court battle, Barkley's claims against Credit Suisse, JP Morgan Chase, and Fannie Mae were resolved in an out-of-court settlement, subject to a confidentiality agreement. Her lawsuit with United Homes is still unresolved.) According to Barkley's lawsuit, United Homes concealed damage in houses the company sold and engaged in the very profitable (and collusive) practice of "property flipping." Barkley's lawyers at South Brooklyn Legal Services say that their clients in the United Homes case are entitled to have their mortgages declared invalid, to receive compensation for their actual financial losses, and to receive additional financial compensation for the alleged wrongs they have suffered.

Yaron Hershco, owner of United Homes and a number of other one-stop shops, did not return calls placed to his lawyer requesting comment for this article. However, in a previous interview, he dismissed the charges in the lawsuits against his companies. "We sold thousands of homes over the years, and they came up with six lawsuits," he said. "And some of the allegations they made on the complaint were false."

Hershco's customers, however, have an unusually high record of going into foreclosure, according to RealtyTrac, which reviewed sales by two of Hershco's companies, the Galit Network and the United Property Group. Out of 208 properties sold by the Galit Network between 2002 and 2006, at least a quarter of them ended up in foreclosure. Customers of United Property Group had a similar foreclosure rate: Out of 64 homes that the company sold during the same four-year period, over 25 percent of them ended up in foreclosure.

Hershco said that that there were a number of possible explanations for this. "Maybe they got divorced, maybe they lost their job, maybe they are on disability, or maybe they cannot make their payments," he theorized, adding that he didn't think that the RealtyTrac data was accurate.

Certainly, many homeowners have been and are complicit in fraudulent real estate scams, lying about their incomes, or allowing their earnings and assets to be inflated on mortgage applications. But for low-income homeowners who maintain that they were unwitting victims, such as Sandra Barkley, there is little recourse.

Congress is trying to outlaw the types of predatory lending practices that fueled one-stop shop scams and put people like Barkley in financial sinkholes. H.R. 1728, a proposed bill, which passed the House on May 7 (and is now languishing in the Senate) establishes an ability-to-pay standard that would prohibit the types of loans that were made to Barkley, thus providing an extra layer of protection to vulnerable homebuyers. The bill would also offer some legal remedies that may enable victims of predatory loans to fight foreclosure proceedings and get their mortgage restructured.

However, advocates say the bill goes conspicuously easy on Wall Street, because the financial disincentives to investment banks for securitizing loans prohibited by the new law are relatively limited, while the trusts that buy and hold mortgage-backed securities for investors would face little or no liability at all. "If you are going to fix the mortgage market, you have to build in responsibility for everyone," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "What needs to happen ultimately--and I am not holding my breath that this congress will do it--is that whoever holds the loan has responsibility to the homeowner. And the investors who get sold the bonds should also have the ability to get redress from the secondary market player who created them--the originator, the investment bank, and there is a pretty good argument that credit rating agencies also should be held liable."

Another major concern is how the new federal bill would preempt states from enacting stronger anti-predatory lending laws, similar to the one New York State law passed last summer. Under the New York State law, which is grandfathered into the proposed federal bill, banks and investor-owned trusts that purchased predatory loans can be held liable whether or not they knew the loans were illicit. As a result, New York State judges are empowered to grant various kinds of relief, which could include modifying mortgages to homeowners in foreclosure if they can prove that they were the victims of a predatory loan. "It was the determination of our legislature that they were going to make everyone liable," says Deputy Superintendant and General Counsel of the New York State Banking Department Marjorie Gross.

But even the existing New York law would not help Sandra Barkley. Neither that nor the proposed federal bill promises relief for defrauded homeowners whose mortgages predate the legislation--namely, those who purchased homes during the boom. What's more, for these homeowners, simply winning a lawsuit against a secondary market mortgage originator (like Olympia Mortgage, which forfeited its state license to act as a mortgage lender five years ago amidst scandal) may not be enough to recover financial damages or forestall foreclosure.

Actually winning these types of cases is terribly difficult, as well. Because of the way mortgage backed securities are structured, typically the only recourse for homeowners who contend that they have been defrauded is to prove that the companies that securitized the mortgages and the investors that bought them were complicit in the fraud. "One of the reasons we have the problems that we have today is that [Wall Street] built a securitization model that was great at hiding people's liability," says Rheingold. "The company that is foreclosing on this old lady's house is so far removed from the original broker and lender that did it. You go to court and every time you raise a claim the first thing that they say is, 'Boy this is a terrible thing that happened, but we didn't do it. Let us foreclose.'"

An offshoot of these cases being so difficult to litigate: They take years, and are therefore usually beyond the financial resources of low-income homeowners in or on the verge of foreclosure. An upcoming report from the Brennan Center for Justice documents the troubling number of homeowners who face foreclosure without the benefit of legal representation. Of the cases where there is legal representation, many end up being handled by financially strapped Legal Services organizations, which depend on the federal government for most of their funding. In addition to having limited financial resources, Legal Services operate under so-called "poison pill" restrictions that were an outgrowth of Newt Gingrich's Contract With America, which had sought to eliminate Legal Services altogether. These restrictions, which the Obama administration wants to overturn, include a prohibition on Legal Service lawyers bringing class action lawsuits or collecting attorney fees from the losing side when they win a case under consumer protection laws that provide such fees. (In several instances, states are taking action that could affect trusts that hold predatory loans. Click here for a rundown of the most significant.)

Barkley, for her part, is still living in her house in Bedford-Stuyvesant, where there are currently about 50 houses in foreclosure on her street alone. And although her legal battles are partially resolved, Barkley is still trying to fix plumbing and electrical problems that date from when she purchased the house six years ago. Perhaps she should have known better, but then again Barkley was relying on the advice of accredited professionals. "I was very trusting," she says, "I don't think that I asked enough questions--but your lack of knowing is your fault sometimes because you are not supposed to take everything at face value. I am always second guessing a lot of the things I do now."