Margaret Mosunic is 63 and a devout Christian, but if she ever encounters her building contractor again, she has a specific, violent plan of action.
“I want to choke his little Irish neck,” she said in a recent interview in her home of more than 40 years in Queens, New York.
As for the mortgage broker who recommended the contractor? “[He is] a devil in the disguise of a man,” she said.
On Jan. 9, 2008, Thomas Delaney, a broker at Home Consultants, Inc., drove Mosunic to a law office to close what she thought was a $40,000 bank loan, according to a lawsuit filed by Mosunic in Queens County court. She planned to use the money to pay back taxes and make repairs to a downstairs rental apartment, she said.
But that wasn’t the loan that the broker had asked the lender, Emigrant Mortgage Co. of New York to approve, Mosunic’s lawsuit alleges.
An hour later, Mosunic claims, she stood on a street corner with a $20 bill that Delaney had pressed into her hand for cab fare, confused and upset. She had just signed her name to a $300,000 mortgage with terms she alleges she couldn’t possibly meet.
Mosunic’s loan required a monthly payment of $2,227. At the time, her only income was a $738 monthly disability check.
“I was flabbergasted and I was so upset,” Mosunic said when she got her first bill.
The interest rate on the loan was 8.125 percent. But if she missed a single payment by more than 30 days, the rate would jump up to a “default” rate of 18 percent. If that happened, her monthly bill would double, to about $4,500 a month.
While Mosunic was obligated to make payments on the full loan amount, the bank held back half—$150,000—in escrow, with its release contingent on repairs to a downstairs apartment.
Emigrant Bank, the parent of Emigrant Mortgage, said in written answers to questions from iWatch News that loan documents prove Mosunic knew in advance of the closing the amount of her mortgage loan.
The bank said withholding two times the amount estimated to complete repairs is “usual practice” and that Mosunic could have afforded the payments if the renovation had been completed. Then Mosunic would have received the rest of her loan and she could have brought in a tenant, the bank said.
But that didn’t happen. The contractor she hired, at the broker Delaney’s suggestion, took $70,000 and left the job half-done, she alleges in her lawsuit. She says back taxes and bills ate up most of the rest of the $150,000.
She made two mortgage payments. The foreclosure notice came in September 2008.
In the run-up to the housing collapse, millions of borrowers with bad credit bought homes that they couldn’t afford and have since lost to foreclosure.
Mosunic, who moved to New York City from Croatia when she was a teenager, does not fit the usual profile of those borrowers. She owned her house in the Astoria neighborhood outright. She has lived there since the 1960s.
But a low income and poor credit history made borrowing money difficult. With a huge tax bill, payment due on heating oil, and other debt, she needed money badly.
Enter Emigrant Bank, which offered a program that allowed homeowners to borrow about half of their home’s appraised value without having to provide proof of income. The home was the collateral.
In a court filing contesting the foreclosure, Mosunic claims the lender, broker and contractor took advantage of her disability—she says she is legally blind and reads very slowly—and her limited education.
She alleges she was “fraudulently induced” to take out the loan and that it was “entirely unaffordable by any industry standards, thus putting her at clear and obvious risk of losing her long-time home.”
At least a dozen other homeowners in the New York City area have fought an Emigrant foreclosure on similar grounds.
These homeowners alleged that they were deceived, or that the terms of the loans were excessively unfair, or both. Some, like Mosunic, claim they were lied to by a mortgage broker.
Some of these cases have since resolved, with the homeowners accepting a mortgage modification, according to the bank. The bank denies all allegations of wrongdoing and asserts that in one case the borrower violated the loan agreement and that in most others it offered modifications at 6 percent interest with default interest waived.
The bank said that its “no documentation” lending program provided struggling homeowners a needed financial lifeline and an opportunity to improve their creditworthiness.
“As a general matter, it is absolutely the case that, in addition to a loan commitment letter, each Emigrant borrower was issued all of the documentation required under federal and state lending laws, including a Truth in Lending disclosure statement and a HUD Good Faith Estimate,” the bank said.
Making mortgage documents easier to understand is a top priority of the new Consumer Financial Protection Bureau, which formally launched in July with a broad mandate to make borrowing money fairer. The CFPB will also have regulatory authority over mortgage brokers and it can draft new rules governing loan products for banks like Emigrant that have more than $10 billion in assets.
The agency declined to comment for this story, and has not yet set forth any detailed new rules governing the home loan industry. As the foreclosure crisis drags along—RealtyTrac estimates 2 million foreclosure notices will be sent in 2011—additional rules that seek to help keep borrowers out of loans they can’t afford seem likely.
But no regulator can solve Mosunic’s dilemma.
She may lose her only possession of value: the two-family brick home on a quiet street that her immigrant parents bought soon after moving to the United States. She has lived in it since she was a teenager.
She owes Emigrant about $470,000, including penalties and interest. Unable to work since a brutal attack more than 20 years ago, she has little chance of paying that money back. She claims that the contractor’s half-finished renovation, which she showed to a reporter, has left her home uninhabitable. She is now staying with a friend.
But a bad experience is not the same as a fraudulent one, and a loan with terms that a borrower cannot repay is not the same as a loan made in bad faith.
Convincing a judge to invalidate a contract based on allegations that it is unfair to one side is difficult, foreclosure lawyers say. And her claim that she didn’t know in advance the terms of the loan faces major challenges. Among them: A loan application filed months before the closing that Emigrant says bears her signature, and conflicting information in filings by her own lawyers about how much she thought she was getting.
In several iWatch News interviews, Mosunic said she is still confused about how she fell into so much debt.
But she remembers her broker very well.
Mosunic first met Delaney after he called an elderly friend in the fall of 2007, offering his services as someone who could extract value out of her home. The friend said that she wasn’t interested, but that she knew someone who needed money badly.
Mosunic owed more than $25,000 in back taxes on her home, which sits on an attractive block in the rapidly gentrifying Astoria neighborhood, and thousands of dollars more in other unpaid bills. The state had put a tax lien on her home and she was worried that she might lose it.
Delaney, who could not be found by Mosunic’s lawyer or by iWatch News, claimed that he could quickly secure her a $40,000 loan using her home as collateral, Mosunic alleges in her lawsuit.
She said that she gave him financial information, including records that showed that her income was less than $1,000 a month. Mosunic alleges in her lawsuit that it wasn’t until the closing, at the office of law firm Mattone, Mattone, Mattone in College Point, Queens that she learned that she was borrowing $300,000, not $40,000.
Mosunic said she asked what was going on. Delaney told her not to worry about it, she said.
“He said ‘Sign, sign. You can’t stop. You have to keep signing,’” Mosunic told iWatch News in an interview elaborating on her allegations in the lawsuit.
She claims the broker told her that the notary public earns $250 an hour so she had to hurry. She was told that another closing was scheduled very soon, and that she had to hurry, Mosunic said. Everything would be fine, she said the broker told her.
Neither the bank’s own files, nor Emigrant’s attorney’s recollection of the closing, support any claim that Mosunic was confused or unaware of any of the key terms of the loan, Emigrant told iWatch News.
Emigrant further said that attorneys who work for the bank are instructed not to close on a loan if they sense confusion on the part of a borrower, or if they discover that a borrower feels there has been a misrepresentation.
Joseph Mattone Jr., the head of the law firm that represented Emigrant, said when reached by phone by iWatch News that he was not familiar with the case and could not comment. But he said that his lawyers are at closings to look out for the interests of their client—Emigrant Bank—not borrowers, mortgage brokers, or anyone else. He said that his attorneys typically “don’t interact” with prospective purchasers.
“If that woman thought something was going on, my doors are not locked,” he said. “She could have walked out at any time.”
Emigrant said that the government vets brokers through its licensing process and that the bank ensures that those it deals with have those licenses. The bank also said it confirms that brokers are not on a Freddie Mac “exclusionary list.”
“These brokers are not agents of the bank and we cannot be expected to police the activities of the more than 2,000 brokers Emigrant works with,” the bank said.
Delaney, whose brokerage is one of the hundreds that failed after the collapse of the mortgage market, later made repeated calls to Emigrant asking that the bank release the $150,000 that it had held back pending completion of the renovation, Emigrant said. “Of course, as it turns out, if we had not held back these funds, the borrower’s contractor might have stolen the entire $300,000,” Emigrant said.
Whatever Mosunic’s interactions with the broker, her allegations that she didn’t know in advance how much she was borrowing are “absolutely false,” Emigrant said.
In October, months before she closed on her mortgage, Mosunic applied for a $257,000 loan from Emigrant, according to an application provided by Emigrant to iWatch News. A letter from a lawyer who was representing Mosunic in 2009 says that she required a loan “closer to $150,000” to pay taxes and complete repairs and asked for a waiver to reflect her “original desire” to close on a $150,000 loan.
These two documents prove that Mosunic knew what she was getting into in advance, the bank said.
Mosunic’s current lawyer, Elizabeth Lynch at MFY Legal Services, said that Mosunic’s story hasn’t wavered. Mosunic claims she was told by her broker that she was applying for a $40,000 loan and didn’t realize she was applying for a $300,000 loan until the day of the closing.
“Based on the loan application [iWatch News] showed me that does not appear to be her signature and that is something we would raise as an issue in court with a handwriting expert,” Lynch said.
And the language in the previous lawyer’s letter is likely an acknowledgment that Mosunic’s debt and the cost of her construction would not have been fully covered by a $40,000 loan, Lynch said. She said that it was “poorly phrased.”
Mosunic didn’t realize how much she owed in back taxes or how much work she needed to make the apartment habitable, the lawyer said.
On Jan. 28, 2011, Judge Janice Taylor denied Emigrant’s motion to dismiss the case, ruling that all but one of Mosunic’s claims against the bank—a conspiracy claim—could go forward.
Emigrant held onto loans
For most of its 160-year history, Emigrant, a privately-held regional bank that currently holds about $11.7 billion in assets, made meat and potato loans to middle class New Yorkers.
By the early 2000s, Emigrant had moved into the business of lending to people with bad credit in a big way, according to allegations in a discrimination lawsuit filed in federal district court by a mortgage borrower in Brooklyn.
By 2004, more than half of all Emigrant mortgage loans were “no income” loans according to the discrimination lawsuit.
Emigrant said this statistic is “wildly inaccurate” but did not provide a different figure.
The bank said its mortgage branch has made about 9,000 no income loans since 2006, and it that as of June 30, it was servicing about 14,000 loans in total.
The expansion of Emigrant’s no income loan program came while Howard Milstein, a real estate tycoon, was chief executive officer. Milstein, a big donor to the campaign of New York Gov. Andrew Cuomo, was recently confirmed as chairman of the New York State Thruway Authority.
Milstein did not respond to an iWatch News request for comment.
Emigrant, which still owes the $267 million it borrowed from taxpayers under the Troubled Asset Relief Program, wasn’t alone in making loans to people with bad credit, nor was it the only bank to offer no income loans. But its business strategy diverged from most other banks when it came to servicing the loans.
Instead of selling the debt up the food chain, where loans were pooled, sliced, diced and eventually sold to investors as mortgage-backed securities—leading to the collapse of the subprime lending market and very nearly the American economy—Emigrant held on to its higher-risk loans.
This is a point of pride for the bank.
“We never created products to feed the Wall Street securitization machine. To this day, Emigrant’s loans remain in our portfolio. And we service all of our loans in-house, so performance of these loans is of the highest importance,” the bank said.
How, then, to make this lending strategy pay?
The bank was willing to make loans to people with bad credit, so long as the borrower already owned a home for collateral.
The bank said that 85 percent of the 9,000 no income loans it has made since 2006 are still performing.
“For the vast majority of borrowers, these products work, providing a bridge back into the banking system for borrowers who otherwise would have lost their homes or been forced to go to hard money lenders,” the bank said.
Under the Community Reinvestment Act, banks are required to make loans in their entire geographic area, including low and moderate income borrowers. In 2006, the Federal Deposit Insurance Corp., said that the bank “makes extensive use of innovative and flexible lending products and practices” for poor borrowers and specifically cited the no income loans that the bank had made in the evaluation period.
Four years later, in 2010, the FDIC again said that the bank was innovative and flexible, but did not mention no income loans in the report.
Like most of its peers, the bank does a “satisfactory” job of meeting its Community Reinvestment Act obligations, according to the FDIC.
Mosunic claims in her lawsuit that her experience was anything but satisfactory. She said the loan she got was “unconscionable”—essentially, so unfair to her as to make it invalid.
Her foreclosure challenge alleges that the bank “knew or should have known” that she couldn’t afford the loan payments. Since the likelihood of default was quite high, the bank should have included the 18 percent rate when calculating the “true” cost of the loan, the suit alleges.
Default rate controversial
The 18 percent default rate included in some loan contracts prior to 2009 is perhaps the most controversial aspect of the bank’s lending program.
Emigrant said that in the past a default rate was included in certain loan programs “to offset costs for that portion of its portfolio that was delinquent, and also as an appropriate incentive to ensure the borrower would make payment.”
“Since Emigrant does not sell its loans, performance is paramount, and the default rate encouraged borrowers to make their mortgage payments first. A good mortgage payment history is often the first step on the path to restoring credit,” the bank said in a statement to iWatch News.
Others see it differently.
Nina Simon, the director of litigation at the Center for Responsible Lending, said that making loans to people with bad credit without checking their income, and then including a trigger that could more than double the interest rate if they miss a payment, was a recipe for disaster.
“Who comes up with this stuff?” she asked. “It’s outrageous.”
Eric Feinberg is a lawyer in Rockland County, N.Y. who is representing an Emigrant borrower in another case. “If things go bust, then the bank takes the house,” he said. “It is a win-win for them completely.”
Even in a bad economy, a home in a gentrifying New York City neighborhood can be worth quite a lot. Mosunic’s home was appraised in 2007 by the city for $729,000. It is now worth $685,000, according to a recent New York City appraisal.
Emigrant said that it is “indisputable” that no income loans are of higher risk than traditional loans. But failure is costly, not just for the homeowner, the bank said. Nearly every foreclosure of a mortgage of less than half a million dollars is a money-loser for the bank, it said.
As of Jan. 1, 2008, about two out of three loans made by Emigrant did not include a default rider in the contract, the bank said.
But of those loans that have failed, many included the default rate, according to an iWatch News analysis of mortgage documents for borrowers in foreclosure.
In New York, foreclosures must go through state courts. iWatch News randomly selected 54 Emigrant residential foreclosures to examine out of 401 currently categorized as “active” by the courts. Of those failed home loans, 44, or 81 percent, included a default interest rate of 18 percent.
Emigrant said default rate riders were included in certain loan programs offered by Emigrant because they were deemed to be of higher risk.
“So it is quite natural that a greater portion of loans in foreclosure would include that rider,” the bank said.
The bank also said that no Emigrant loan ever went in to default because of an 18 percent interest rate and that default interest is always waived as part of Emigrant’s loan modification process.
Lynn Armentrout, who heads a nonprofit project that helps people facing foreclosure co-sponsored by New York’s City Bar Justice Center and the Federal Reserve Bank of New York, said she has reviewed hundreds of mortgages from every major lender in the New York area. Emigrant is the only lender she knows of in New York City that made loans with an default interest rate as high as 18 percent, she said.
“Although we can only speak specifically for Emigrant, we are aware that other banks that have included a default rate in their loan documents,” the bank said. “In addition, we know that the U.S. government, [New York state] government, credit cards and others, charged – and still charge — a default rate of 18 percent or more.” Last year, in an opinion issued in another Emigrant foreclosure case in Suffolk County, N.Y., state court judge Jeffrey Spinner wrote that the mortgage agreement was “starkly revealing and greatly disturbing.” That loan was made with an initial adjustable interest rate of 11.65 percent, and it included the 18 percent default rate.
“It is a virtual certainty that [the borrowers] were not afforded the opportunity to freely bargain and negotiate in reaching the operative terms that are now subject to this Court’s scrutiny,” Judge Spinner said.
The lawsuit later was settled for undisclosed terms, and the opinion was rescinded, after what Judge Spinner described as “continuing good faith negotiations” by both Emigrant and the homeowner.
New rules may have helped borrowers
Regulators and lawmakers have already taken steps to address the type of unfair default interest rate allegations made by Emigrant borrowers in their court challenges.
The New York State Banking Department said it cannot discuss lending practices at specific banks. But in 2007, the agency warned state banks against making nontraditional or subprime loans that include the possibility of “significant payment shock” for a borrower such as a sudden increase in the interest rate.
Rholda Ricketts, Deputy Superintendent of Banks for Mortgage Banking , told iWatch News that the regulator strongly supported a 2008 law that made it illegal for New York banks to include triggers in loan documents that significantly boost interest rates on subprime loans after default. That law went into effect Sept. 1, 2008. Emigrant said that loans made with the 18 percent default rate were not subprime loans as defined under New York law, and that it didn’t stop making loans with that rate in response to the new law. Emigrant’s default interest rates in New York were reduced to 16 percent on February 1, 2009, and to 3 percent above the contract rate on Oct. 1, 2010.
These reductions applied to loans existing in the portfolio that were originated prior to these dates, as well as to new loans, Emigrant said.
Moreover, the bank said it also now waives all default interest if a loan is reinstated within five months of the first default.
Regulators have also moved to make illegal a bonus system that many have said encouraged mortgage brokers to convince borrowers with the worst possible credit to apply for loans.
In some instances, Emigrant, like many other banks, paid brokers a “yield spread premium” bonus to brokers for bringing in higher interest rate loans.
For example, a broker who helped Gail Greene borrow nearly $500,000 to refinance her home near LaGuardia Airport in Queens got a “yield spread premium” of $2,460 bonus for selling a loan with an interest rate of nearly 12 percent.
Emigrant says that it was not unusual for banks to pay yield spread premiums, and that it complies with all regulations for mortgage broker compensation.
The Federal Reserve recently outlawed these types of bonuses, which the regulator said give brokers incentive to steer borrowers to more expensive products.
Consumer advocates applaud such moves, but say that the CFPB should move to set clear and tough rules governing mortgage brokers and mortgage loans that would apply to the entire country.
Future borrowers may benefit from new rules that the CFPB is considering that would simplify mortgage disclosure forms. The agency is requesting feedback from consumers on draft versions of short, concise forms as part of the agency’s “know before you owe” initiative.
An uphill fight
Lawyers who have handled similar cases say Mosunic faces an uphill fight against Emigrant.
But “winning” for most homeowners facing foreclosure is not a court decision ruling against a bank. What they really want is a mortgage modification on favorable terms that lets them keep their home.
Emigrant said it offers “the best modification program of any major bank, with better results than the federal [Home Affordable Modification Program].”
Not surprisingly, Mosunic’s lawyer and the bank dispute whether a fair offer was ever made.
In early 2009, the bank offered to release the $150,000 it is holding in escrow, but Mosunic’s lawyer—at the time, an attorney working pro bono for the New York City Bar Association—advised she reject the offer because it also called for her to waive most of her legal rights to fight foreclosure.
In September of that year, the bank said it presented Mosunic’s attorney with an Emigrant loan modification package. A few weeks later, the bank said, the “loan modification offer was turned down by the borrower.”
Lawyers for both sides met before a court-appointed referee in November of 2009. In a filing, that referee noted that Mosunic had not appeared in person nor had submitted financial information needed to evaluate her case. With no deal on the table, the referee ordered the foreclosure case to proceed.
But Lynch said no modification “offer” was ever made and that Mosunic did not qualify under the bank’s own rules. The modification application made clear near the top that Mosunic did not qualify for a modification because she had received more than 10 percent of the loan value in cash, Lynch said.
A year later, Emigrant filed a motion stating that the “loan was not eligible for a modification under the Emigrant guidelines as the Defendant received over $90,000 cash at closing and did not submit any paperwork to establish a hardship.”
In mid-August, after a 19-month draught, the two sides began talking again.
The bank offered to send one of its engineers, free of charge, to inspect the house to see what repairs would be needed to make the first floor apartment livable, Lynch said. From there, Emigrant would allow Ms. Mosunic to use her $150,000 escrow to pay for the repairs. Whatever money was left over would be applied to the principal.
Emigrant said in an email to iWatch News that once the repairs are complete, the loan would then be modified at 6 percent, with all default interest waived. “This is essentially what we were prepared to do more than two years ago,” the bank said.
But Lynch said the bank declined to discuss with her specific terms of a modification beyond the repair work. The first she heard of a 6 percent offer was from iWatch News, she said.
Lynch also said that waiving of delinquent interest is not the same as waiving all interest charged and that many details—such as whether the bank would charge interest on the entire $300,000 loan, or on just the $150,000 that it had paid out—would need to be hammered out.
In addition, she said, the maximum interest rate under a HAMP modification is currently about 4.5 percent—a better deal than what Emigrant said it is willing to make Mosunic.
For now, Mosunic remains in limbo.
She borrowed money from friends to continue repairs on the downstairs rental apartment, but there is still work to be done. She can’t rent it out until the foreclosure is resolved.
“My mother and father worked too hard to buy a house when they came here,” she said of her decision to continue to fight the foreclosure.
“What’s peculiar is just the word ‘Emigrant’ and me being in an immigrant, which is derived from the same word,” she said. “I just want to keep my home.”
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