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Bargain been : The Millers' old house, just off Lockhart Gulch, is now listed for $25,000 less than the Millers paid for it.

Borrowed Time

The second in Paul Wagner's two-part series on the housing crisis examines a Scotts Valley family that got taken in and run around.

By Paul Wagner

One could hardly find a more all-American couple than Steve and Heather Miller. Sporting magazine-cover good looks and friendly personalities, they fulfill their roles as parents of four with the same warmth which with they practice their faith--the kind of Christianity that puts up with none of this naming the homeless subhuman or labeling first-time criminals irredeemable.

Steve owns and runs a landscaping business successful enough to have an employee and provide steady work; Heather does the accounting. When they're not occupied with that, the Millers home-school not only their own children but others belonging to a countywide parents' collective. And their hardworking lifestyle has rubbed off on their children, the oldest of whom keeps winning county spelling bees.

They are, in short, the last people you'd expect to leave their home in default. And they're also entirely unlike the fictional family, invented by finance-industry apologists, who allegedly lose their homes due to a greedy hankering for too much house leveraged on too little income.

And yet they no longer live in the home in which they had imagined they'd raise their family, and it sits ready for "short sale"--a profit-losing quick sale to get rid of unwanted property.

Unlike the Ramirez and Martinez families--whose story we told last week--the Millers were not lulled from inexpensive rentals by promises of easy ownership.

Rather, their comfortable seven-year rental of an entire house ended when its owner wanted to move back in. A few weeks later, after scouring the rental market for apartments for a family of six and finding rents exorbitant, they approached a real estate agent about buying their first home.

And presto, a candidate home emerged: 1,280 square feet, 1 1/2 baths, propane tank and yard in the Lockhart Gulch area of rural North County.

Not the largest home in the fanciest neighborhood in the world, but at $500,000, back in 2005 (when the average home price in Santa Cruz County was $835,000), a relative steal. And unlike with many other cattywompus houses in the area, says Steve Miller, "we thought we were really lucky to find it, because it wasn't perched on stilts."

The only problem was that everything had to be done insta-presto-panic-quick, because, say the Millers, their agent pointedly observed that so many people were realizing "it's never a bad time to buy a house," since "real estate doesn't lose value," that everybody was doing it and frantic about it and, no, there's no time to collect income docs or take the loan papers home and read them, they've got to be signed now, right now, before noon, otherwise this "once-in-a-lifetime opportunity to get your foot in the door in this county's housing market" will disappear forever and who's gonna be sorry then?

So even though Heather Miller did her darnedest to gum up the works by insisting on submitting income documentation, it was a mere 30 days before the mortgage and title and loan docs were all ready. The Realtor brought a bouquet of gorgeous flowers to the final signing.

And there, amid the floribundance, the Millers--despite substantial income and fairly good credit--ended up signing for one loan at 10.5 percent interest, to cover the down payment, and a second, no-money-down, interest-only subprime loan at 6.25 percent. The loan was with New Century--the same lender who was simultaneously collecting payments from the Ramirez and Martinez families (see "Home, Sweet Hell," Cover story, Sept. 3).

And with their signatures, their agent collected a loan origination fee--per the loan documents--of $8,300.

Only later, say the Millers, did they come to know that they'd signed up for a subprime loan. Their agent never called it that, nor did she mention that it would later reset at a far higher interest rate with far higher payments. If anything, they say, she averred that their $3,370 monthly payments would decrease, because in a couple of years she'd call and "we'll refinance you into a conventional loan"--rather than the interest-only one they'd signed for--and get the payments down about $500. Shortly after, she moved out of state. No call came.

But the inevitable gift, an enormous selection of deluxe cookies, did. In, Miller recalls, a gorgeous royal blue box.

Diving Stocks
Things went pretty smoothly for the Millers for the first year and a half. The landscaping business grew, the payments were high but doable, and the children grew all by themselves without too much pulling and stretching.

But unbeknown to them, New Century, their main lender, was digging itself into a hole.

New Century had never been very strong. It had survived the dotcom-crash cash flow jitters early in the decade only by selling the right to bill and collect from its borrowers (known as "servicing" loans) to a little publicly known Florida company named Ocwen.

And to get the deal, New Century had to turn over more than 80 percent of its serviceable loans to Ocwen--some $4.9 billion--for a mere $20.5 million in cash. And promise to sell yet more loan servicing contracts to Ocwen should it need cash again.

Which it did, and did, and did. By the time the Millers had had their loan for a bit over a year and a half, not even Ocwen's cash infusions could save New Century. Stock prices of $66 per share (circa early 2005) took a series of dives throughout 2006. The company's founders began dumping their shares. By early 2007, stock value was $11.

In early February of 2007, New Century admitted that in its internal panic it had lost count of borrowers' missed mortgage payments. In late February, a federal prosecutor in California began a criminal investigation into its accounting lapses and trading practices, and found that New Century had less than 5 percent of the cash value of its loans.

On April 2, 2007, New Century Financial filed for bankruptcy, laid off half its workforce and sold itself to another company. Its final stock price: 92 cents per share.

And how had this happened? As the federal bankruptcy examiner appointed to review its collapse wrote in a 581-page report, it "created a ticking time bomb" that detonated in 2007. "New Century engaged in a number of improper and imprudent practices related to its loan originations, operations, accounting and financial reporting processes," reads the report. Among those practices: selling mortgages with unsupportable low teaser rates, collecting no income documentation and using flawed and fake property-value appraisals.

Where did the loans go? They were scooped up by New Century's former savior and loan "servicing" company, Ocwen.

The Plot Thickens
Ocwen notified the Millers that it had acquired servicing rights to their former New Century loan around three months after they first moved into their Lockhart Gulch home, and at first it didn't make much difference--little glitches in applying payments properly, but those were reversible and got reversed.

Then came the upward rate adjustment built into all subprime loans--the end of the low teaser rate and the sudden increase in monthly payments due--neither of which they say they'd been told about on the day of the final signing.

That upward adjustment cost $850 a month more--a nearly 25 percent increase, from $3,750 to $4,600. How, they called and asked Ocwen, could a loan clause allowing a half-point adjustment "up or down" every six months come to that much? The Millers say the only answer they got was "That's our policy."

Next, they say, payments started disappearing. Opening an Ocwen statement claiming they were 30 days late, Heather Miller called. Yep, you're late, said the voice on the phone. No, we're not, said Miller, and faxed proof of every payment made. OK, said Ocwen, you're right. It was misapplied.

But the Millers say the lenders subtracted a "late fee" regardless, and without notifying them. That made their timely payment only "partial," which meant they were still "late." And thus owed a $125 fee.

That made their next on-time payment only "partial" as well, meaning that they were "late" again--now, a total of 60 days--two-thirds of the dreaded 90 days that spells default. Plus they owed another $125 "late" fee. For having made both payments on time.

"I thought," Heather Miller recalls, "I was working with a really disorganized company."

Unbeknownst to the Millers, Ocwen's practices--whether merely disorganized or deliberately predatory--had already caused a stir nationwide.

Back in 2000, Housing and Urban Development had forced Ocwen to pay its legal costs after that federal agency went after the lender for repeatedly violating collection rules on HUD loans.

By 2004, new problems had surfaced, and on April 19 of that year, the federal Office of Thrift Supervision marched in and forced Ocwen to sign a Supervisory Agreement, which said: We will no longer charge fees to send letters of default. Or fees for copies of those payment plans known as "forbearance" agreements. Or fees to tell you how much it would cost to pay off the rest of your loan.

And we will set up an office of an ombudsman to report every unresolved borrower complaint to the OTS by the 15th of each month. And continue to do so for at least six years. Said Ocwen chairman William Erbey about the OTS oversight, "We are grateful for the insights gained."

Those insights apparently proved insufficient. By the end of 2004, California judges heard lawsuit after lawsuit accusing Ocwen of "failing to post monthly mortgage payments properly, charging inappropriate late fees, prematurely referring accounts to collections and forcing homeowners into default as part of a scheme to generate fee income." Those are the words of trade publication Mortgage Servicing News. Shortly thereafter, Ocwen shut down its bank, Ocwen Federal, in a "voluntary dissolution."

The words of a Galveston, Texas, county jury were even stronger: Ocwen was guilty of a "scheme of unfair, unlawful and deceptive business practices," the jury said on Dec. 5, 2005, after the lender tossed a 64-year-old woman out of her home for sending a single payment late while hospitalized for four days and somehow managed to parlay that four-day lapse into a forced foreclosure. The jury's award: $11.5 million.

The lawsuits began affecting Ocwen's finances. On May 8, 2006, a major ratings agency downgraded four classes of its securities. Throughout the year Ocwen's SEC filings were filled with page after page of court filings concerning it, each of which it claimed were "without merit"--and legal judgments against it, all of which it claimed were "against the weight of evidence and contrary to law" and which, it promised shareholders, it "would vigorously defend."

But others apparently saw merit where Ocwen claimed not to, and in 2006 the South Florida Business Journal reported that "Ocwen and affiliates are defendants in more than 500 civil suits filed in federal courts since 2002."

In September of 2007, Ocwen was forced by Massachusetts' attorney general to pay into a $1 million settlement to compensate borrowers for fraud. The charge? That the lenders, including Ocwen, "funded loans which facilitated fraudulent foreclosure rescue transactions."

The Denouement
Meanwhile, back in Lockhart Gulch, Steve and Heather Miller--like HUD, the Office of Thrift Supervision, the Galveston jury and the Massachusetts attorney general and 500 sets of other complainants nationwide--began to conclude that they'd had just about enough.

What set them off, they say, was when they sent a mortgage payment in a few days early to avoid the ever-rising "late" fee. Ocwen classified the early submission as an "overpayment," put it into a previously undisclosed "trust fund" and marked the payment as unmade, because, after all, nobody decent taps a trust fund. That then imposed yet another late fee, and as a special bonus, a $500 fee for "foreclosure appraisal." Because, after all, they were "late."

Heather Miller says she called Ocwen's federally required ombudsman for help. She recalls that the ombudsman said the Millers weren't eligible for help because they weren't yet in full foreclosure.

So she called the national Mortgage Bankers Association's HOPE line for defaulters. Can't help, said HOPE, because you're not actually late. Please do not call 888.995.HOPE if you are not late on your mortgage. But Ocwen says we are late, said Heather. But, said HOPE, you're really not. Thank you for calling. We value your call.

So they turned back to Ocwen and after endless correspondence got what appeared to be a reprieve--an offer to cut $270 off their monthly payments. Days later, the letter came announcing their semiannual upward rate adjustment: an additional $360 a month. Heather Miller finally concluded: "I was dealing with a fraudulent company."

Not only was the steady drain of money from constant fees draining the family bank account, the stress was ripping at the family's structure. "I can't tell you how many nights the kids would be waiting for Mom to read them a bedtime story, and instead Heather was on the phone, yet again, with the mortgage company," recalls Steve. "I think," says Heather, "that I spent more time in that last year baby sitting the mortgage lender than baby sitting my kids."

In January of this year, the Millers wrote one final letter to Ocwen: "We have paid you enough." They refused to send another penny until it was all straightened out. Heather says they never received a response.

So they simply stopped paying, stopped communicating and moved out of the house. It took three months to find a rental, but they did--a 2,000-square-foot, four-bedroom house near the beach with a family-friendly landlord. Monthly rent: $1,995 a month-- "less than half our old mortgage for a house twice the size," says Heather.

And there's another set of ironies. When Ocwen sells the Millers' former house, it will get paid. So will Litton, the company that loaned the Millers their down payment fee, because the Millers made sure to buy mortgage insurance. And their original Realtor, who earned $8,300 in loan origination fees and a 3 percent commission (around $15,000) on the sale of the house, did very well on the transaction.

The only people out money are the Millers, who spent around $125,000 over the 2 1/2 years--"about the same amount a 20 percent down payment for a conventional loan would have been," notes Heather--and accumulated not 1 cent of equity. They have signed on, though, to one of the many class action suits against Ocwen active in the California courts, one filed by the law firm Lieff Cabraser Heimann & Bernstein, to see if they might someday recover some of their expenses.

The experience has left its emotional traces. "I am a bit ashamed," says Steve Miller, his eyes growing reddish and small, "of getting taken like that." They cup their hands when recalling "the lender that was strangling us."

But overall, the Millers are happy to have gotten out, and have hopes, once the market has settled and they've accumulated a bona fide down payment, to try homeownership again.

Besides which, there were some very good memories made in the Lockhart Gulch house, whether it's still theirs or not. And although the contents of the gift from their agent--the deluxe cookies--are long gone, the gorgeous blue box in which they arrived remains a constant. Says Heather Miller, as her husband smiles, "I still have the box."

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