First of two parts
ST. PETERSBURG — Greg Vautrinot wanted to open a sandwich shop in 2005, so he refinanced his tiny Shore Acres bungalow and borrowed $127,500 from a subprime lender.
Within two years, the business was struggling, his expenses were rising, and he could no longer make the payments.
In a bygone era, Vautrinot would have gone to his neighborhood bank, met with the loan manager — likely the same person who issued the loan — and tried to work something out. If they couldn't reach an agreement, the bank would have foreclosed and sold the house.
Vautrinot encountered a much different reality. Indeed, his story shows how the complexities of modern mortgages created a quagmire for the consumer, the courts and the country.
Today, foreclosures involve a broad cast of players — from banks to loan servicers to law firms to different classes of investors. Competing financial interests mean they often work at cross-purposes. Complicated self interests can pull some of the players in multiple directions, adding to the unpredictability of their actions.
When a home loan goes bad, common sense seems to go out the window.
"It should be the simplest of all civil cases," said J. Thomas McGrady, chief judge for Pasco and Pinellas courts. "A borrower signs a note, and if he doesn't pay, the lender gets the house. Now the lenders have come along and messed it up."
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Vautrinot, 47, stopped paying his mortgage in 2008, after his adjustable rate jumped to 10.85 percent, pushing his interest and principal to nearly $1,200 a month.
Unbeknownst to Vautrinot, his loan had been bundled with 10,000 other risky loans into a $2 billion fund bought by pensions, insurance companies and private investors. Deutsche Bank was named trustee of the fund. Carrington Mortgage Services collected the loan payments and passed them along to investors.
Vautrinot said he tried to negotiate a lower payment with Carrington, but the servicer didn't respond to his calls while he was still making payments.
That's not unusual. Servicers have little incentive to modify a loan if homeowners are paying, no matter how close they may be to financial oblivion. When payments stop, it usually costs more for a servicer to work out a modification than to move straight to foreclosure.
Carrington, on behalf of Deutsche Bank, filed to foreclose on Vautrinot's home in September 2008. The company then dropped the foreclosure and offered him a loan modification in January 2009.
"I got a letter out of the blue from Carrington, saying they'd lower the interest rate and reduce my monthly payment," said Vautrinot, who was excited but puzzled by the offer.
Though he now could afford the monthly payment, Vautrinot was unable to catch up on the thousands of dollars in late fees, penalties and unpaid taxes and insurance he owed. His modification plan was a bust, a common scenario. The government's loan modification program was expected to help up to 4 million households. So far fewer than 550,000 loans have been permanently modified.
Chris Orlando, a spokesman with Carrington, said that he could find no record of a demand letter to Vautrinot for a lump-sum payment and that back taxes and insurance are generally rolled into the loan modification. Once the modification offer was made in January 2009, Orlando said, the servicer called Vautrinot nearly two dozen times in the following 10 months to offer additional assistance.
"Mr. Vautrinot declined those offers and failed to submit any of the documentation required by the government's (loan modification) program, which could have helped to bring his loan completely current and further lowered his payments," he said.
While the modification was of no help to Vautrinot, it may have been beneficial to Carrington because of the way servicers operate. Under their contracts with investors, servicers agree to continue advancing payments to investors after a homeowner defaults. Generally such advances continue until the home is sold or the advances are deemed "unrecoverable" because the home's value is so low. But when a loan is "recapitalized" through a modification — by tacking missed payments onto the unpaid principal and declaring the loan current — the servicer may be able to recoup its advances.
In Vautrinot's case, the modification offer bumped the value of his IOU from about $124,000 to $135,000. Even though there was little chance he could repay, on paper the total assets of the trust looked bigger. Servicers can then tap the trust's reserves for their advances, even though those reserves are intended to protect investors from future losses.
Carrington, which has used this tactic in the past, declined to say if that was the case with Vautrinot's modification. In 2009, Carrington's loan modifications were targeted in a lawsuit by Ohio's attorney general, who called the offers "unfair, unreasonable and one-sided." Carrington's spokesman, who refused to comment on the Ohio litigation, said the company services loans as required under its contracts with investors and it tries to help troubled borrowers.
Though each case is unique, Vautrinot's experience gives a hint at the kinds of machinations that go on behind the scenes when a borrower defaults.
Investors who paid a premium to be at the front of the payout line might be pushing for a quick sale so they can pocket whatever's left of the investment before it gets eaten up by fees. Or they might favor a modification if it keeps the homeowner paying and results in lower overall losses.
Investors with lower priority, meanwhile, might want to delay a foreclosure sale since they usually get paid by the servicer while the house is on the market; a sale leaves them empty handed.
The servicers, who decide how the property is handled in a foreclosure, aren't necessarily neutral parties. Often they own lower-priority bonds or second mortgages on the home, giving them a financial interest beyond servicing fees. These investments get wiped out when the house is sold. So while a quick sale might benefit senior investors, it would mean a loss to the servicer.
A spokesman for Carrington said it did not own any of the trust holding Vautrinot's loan. But Diane Thompson, an attorney with the National Consumer Law Center, said there may be other motivations for servicers to "troll through people in default to generate modifications."
"It allows them to say to investors and regulators, 'Look, we're making these offers,' then it becomes the homeowner's fault," said Thompson, who has testified before Congress about servicing issues. "It's standard practice to offer loan modifications that are unworkable and unsustainable."
In May 2009, Deutsche Bank once again filed to foreclose on Vautrinot's home, just one of many deals that went bad in the original $2 billion investment fund. In January, Deutsche Bank said nearly 40 percent of the loans in Vautrinot's trust were in default, foreclosure, bankruptcy or bank-owned.
The judge ruled in the bank's favor and in October 2009, Deutsche Bank took Vautrinot's house back at public auction. Last February, Vautrinot and his girlfriend came home from work to find a court order plastered on their front door. It gave them 24 hours to leave.
Today, Vautrinot and his girlfriend live in a mobile home, paying $477 a month. He started offering breakfast at his restaurant and now works 14-hour days. "You gotta do what you gotta do to get through this recession," Vautrinot said recently between lunch deliveries. "It's not like I'm Goldman Sachs."
Vautrinot's former home was initially priced at $79,000. Real estate agents complain that brokers sometimes inflate the asking price of a bank-owned home so the bank will give them the listing. The high price often leads to those properties languishing on the market.
The price on Vautrinot's home was dropped in November when a new agent took over. Deutsche Bank recently accepted a cash offer in the low $30,000s.
Vautrinot is not off the hook. The lender could still pursue him for a deficiency, the debt still owed, of about $76,000.
"My credit is ruined and I have no doubt that if they find out I have 10 cents in the bank, they'll come after me," he said. "I understand there are a lot of righteous people out there who think I'm a dirt bag for not paying my mortgage. Sometimes I wonder myself, 'Did I do something wrong?' "
Vautrinot's not the only loser. Pensions and other investors have taken steep losses. Banks are struggling to get rid of hundreds of thousands of bad loans and repossessed homes. And taxpayers are picking up the tab for many of the government backed mortgages.
Some players can make a quick profit in the foreclosure process. For the rest, it's a losers' game.
Times researcher Carolyn Edds contributed to this report. Kris Hundley can be reached at email@example.com or (727) 892-2996.