All his savings, scraped together over years delivering medicine for local pharmacies, were gone, along with the home he bought in 2005 for $410,000. Devastated, the 54-year-old immigrant, along with his wife and three-year-old daughter, packed their belongings and moved into a small apartment, hoping to rebuild.
But that hope evaporated in a matter of months, when Galindo received a letter from a lawyer claiming he owed $136,547 on the family home he’d left behind.
The lawyer represented a mortgage insurance company Galindo had been paying premiums to for years. He’d never given his insurance policy much thought – it was just something he had to buy to qualify for a mortgage since he couldn’t afford a big down payment. He thought it would help him if he got in a bind.
Too late, Galindo realized that the policy only protected the bank, and nothing prevented the insurer from coming after him for losses related to the foreclosure on his home.
“I have to fight every day to find my food and not go to welfare, and then I have to pay (more than) $140,000?” Galindo asked. “What did I pay insurance for? It was a rip off."
What Galindo considers a rip off is an insurance industry practice that has the potential to flatten tens of thousands of former homeowners just as they are getting back on their financial feet. The New England Center for Investigative Reporting has found that more than 200 Massachusetts home owners and thousands more across the United States have been pursued by mortgage insurers for losses ranging from tens of thousands of dollars to more than $200,000 since the foreclosure crisis began about seven years ago.
Private mortgage insurance was created to help less wealthy people buy homes by reducing the risk to mortgage lenders if the borrower defaults. Generally, home buyers who make less than a 20 percent downpayment must buy the insurance, which typically costs $30 to $70 for every $100,000 borrowed, and pays the bank for some of its losses when the borrower doesn’t pay the mortgage and the house goes into foreclosure.
But while the policies have helped hundreds of thousands obtain a mortgage nationwide, they also created a class of home owners who were especially vulnerable when the economy crashed in 2008. They had large mortgages – sometimes pressed upon them by predatory lenders -- and little equity in their houses. When real estate values collapsed, they often owed more than their houses were worth.
And when these buyers stopped making mortgage payments, lenders couldn’t get all their money back even by selling the property – Galindo, for example, had a mortgage of $389,500 while the foreclosure auction brought in just $101,500. Insurance proceeds help cover these gaps, and insurers, in turn, began coming after former owners to recover their losses, sometimes from people who had already lost almost everything.
The recovery process often starts with letters and threatening phone calls and ends with lawsuits, wage garnishments, and even arrest warrants. Former home owners who have been pursued include a New Hampshire grandmother forced into bankruptcy by the process; a Florida couple fighting the insurer’s claim, saying they weren’t adequately informed about the risks of mortgage insurance; and a displaced Maryland family now fearing that an insurance company will seize their car or a relative’s home.
Most major mortgage insurance companies – like California-based PMI Mortgage Insurance Co., which sued Galindo – maintain they have the right to seek damages from former homeowners to recover their losses from foreclosure. But consumer and housing advocates say it’s unjust to pursue victims of an epic housing collapse in which real estate lost 30 percent of its value nationally in four years, according to the Federal Reserve.
Most of these borrowers, they say, had no idea they could be dunned for more money after they lost their homes: Although borrowers sign a paper at closing acknowledging that mortgage insurance protects the lender, not the borrower, documents do not warn borrowers specifically that the insurers could pursue them for losses.
Nationwide, the number of people at risk of being pursued for a mortgage deficiency by insurers or lenders runs into the hundreds of thousands. The companies that dominate the insurance business covered 977,000 loans in 2013 alone, representing about 12 percent of new home mortgages nationally, according to Inside Mortgage Finance.
Such debt collections, said Judith Fox, a Notre Dame Law School professor, add to what she calls the “foreclosure echo” – the damaging effects of the housing downturn on people who are only just recovering financially. “We’ve started to see it more and more,” Fox said.
An examination of hundreds of court documents in Massachusetts and interviews nationwide with scores of former homeowners, housing advocates, and attorneys about private mortgage insurance found that consumers have scant control over whether their insurance company will demand money from them after a foreclosure.
- Borrowers have little choice of insurance companies. Generally, they are required to use the lender’s choice, which is generally identified in closing documents but premium costs may be blended, unidentified, into mortgage payments after that. As a result, borrowers cannot shop for companies that don’t engage in post-foreclosure debt collection.
- The risk of debt collection depends partly on geography. States such as Nevada and California severely restrict insurers from dunning home owners after foreclosure, but other states allow insurers to pursue foreclosure debts decades later. In Massachusetts, insurers must begin debt recovery within two years of foreclosure, but court judgments against former owners are binding for 20 years
- Most companies say that they only target a small number of “strategic defaulters” – homeowners who abandon the property even though they still had the resources to pay toward the mortgage. But the New England Center spoke to former homeowners across the US who say they fought to save their homes and were left with nothing, only to be blindsided by mortgage insurer claims.
In one case, the insurer dropped debt collection efforts after the New England Center informed officials that the debtor was a single mother earning only $30,000 a year and on the brink of filing for bankruptcy.
Mirian Pineda, an immigrant from El Salvador who speaks little English, admits she was naive when she purchased her three-family home in East Boston in 2003 for $550,000. But a real estate broker convinced her she could make a $4,500 monthly mortgage payment by combining rent from two of the apartments and her income working 75-hour weeks as a hospital custodian and moonlighting at a nearby factory.
By the time Pineda realized her mistake, she’d already sunk her $27,000 life savings into a down payment and struggled through several refinancings. In 2010, she let the house go into foreclosure and moved with her son and daughter to a three-room apartment. She couldn’t believe it in the fall of 2013 when she received a letter from Mortgage Guaranty Insurance Corp. claiming she owed more than $160,000 on the house – a number that ballooned to nearly $200,000 with interest and fees
“When we learned her income situation was materially different for the worse compared to the time of her loan, we decided it no longer made sense to pursue collection,” Mortgage Guaranty spokeswoman Katie Monfre said in a written statement.
Some insurance executives said privately that the practice is controversial because it damages the reputation of an industry touting its benefits to homeowners. But, on the record, most companies stress that they pursue only a small percentage of deficiencies and some pursue none at all.
Officials from Genworth Mortgage Insurance Corp., based in North Carolina, for example, generally don’t go beyond letters and calls to former homeowners because more aggressive tactics have such a small rate of return. Officials at the California-based Arch Mortgage Insurance Company say they “currently” don’t pursue deficiencies at all.
On the other hand, PMI Mortgage Insurance Co., Mortgage Guaranty, and United Guaranty Residential in North Carolina each have filed dozens of court cases against former homeowners seeking financial damages for bank losses the insurers covered.
Officials from Mortgage Guaranty said they seek damages in less than 1 percent of its claims nationwide – about 2,000 cases since the housing market began to slow in 2005. Like others, they say they only pursue people they believe walked away from their homes with the ability to pay
“We don’t look to kick widows and orphans out onto the street,’’ said Mortgage Guaranty official Michael Zimmerman.
United Guaranty officials declined to comment, but officials for PMI Mortgage, which sued Galindo, said the mortgage deficiency recovery process allows insurers to “step into the shoes” of the lender to recover losses caused by a foreclosure.
PMI stopped taking new customers in 2011 and was seized by the Arizona Department of Insurance, which has the company under receivership. Steve Clutter, a spokesman for the Arizona agency, said PMI only exercises its right to seek claims in 1 or 2 percent of its cases nationwide – about 400 borrowers since 2011.
“These are a very small number of borrowers who could pay, but made a strategic decision to default on their mortgages,” Clutter said. PMI identifies these borrowers in “a very careful process,’’ he said, including looking at whether former homeowners remain current on other financial obligation.
But consumer advocates argue that most people struggle desperately to save their homes – sometimes opting to stop paying an unmanageable mortgage while still paying smaller bills.
"We owe the money. We just don’t have it." Galindo said he exemplifies that kind of borrower. He lost his home, but he said he avoided other debt because he didn’t use credit cards. He struggled for months to avoid foreclosure, but was unable to make his $2,400 monthly mortgage payment because his tenant stopped paying rent and his delivery job salary dropped from $45,000 a year to $38,000, following a cut in hours.
Galindo’s lender eventually offered him a $3,000 settlement to move out, which he did, and he thought all the issues related to the house were settled until the insurer’s lawyer demanded money. “I don’t see why they picked on me,” Galindo said.
Clutter, in Arizona, said PMI officials would not comment on specific cases or individuals.
For some, the debts were so much larger than their annual salaries that they couldn’t fathom making payments. Leslie and Edward Simpkins lost their Maryland home in 2010 after Edward, 47, was laid off from his $48,000-a-year union job as a painter. He now earns only $15,000 a year working part time.
Leslie Simpkins, a 38-year-old homemaker with three young children, said the couple was shocked to hear from Mortgage Guaranty that they owed $120,000 for losses on the home they purchased in 2007 for $245,000. They attempted to settle with the company’s attorney but were unable to pay even $30,000.
They moved into her mother-in-law’s house and now worry Mortgage Guaranty will put a lien on that home because their relative co-signed for the couple’s original home.
“We owe the money. We just don’t have it," she said. “Talk about lack of sleep, talk of lack of sanity."
Jeff Lane, Mortgage Guaranty’s general counsel, said the company believed the family still had assets, including some $50,000 in equity in their mother-in-law’s home. He said the company is still willing to negotiate a lower payout but the Simpkins, despite what the family said, have failed to communicate with the firm.
“We are fully justified in trying to recover some of what we have lost from those who are obligated to, and can, pay,” said Lane, who had the family’s permission to discuss their case.
Barbara Anthony, the former Massachusetts undersecretary of the Office of Consumer Affairs and Business Regulation, said insurers should be more up front with borrowers about the financial risks of mortgage insurance. “People are confused about what PMI means,’’ she said.
Even a prolific collector for the insurance companies, Beverly, Mass. attorney Jeremy Cohen, recognizes that many borrowers are confused and angry at first because they have either forgotten entirely about the fact they once had mortgage insurance or never understood the implications.
Cohen said he has filed more than 150 cases in Massachusetts courts since 2008 – in about two thirds of cases, he obtained court orders for debts adding up to about $9 million.
“There is a lot of animosity up front, there is a lot of ‘You will never see a dime from me’ attitude,” said Cohen. But, he said, former homeowners “should pick up the phone” because his insurance company clients often agree to a significant reduction of debts in settlement talks.
That kind of reduction happened for David Lazaroff and Meredith Levine – more than a decade after they lost their house.
In 1989, the couple purchased a two-family Allston home for $226,000, but lost it five years later when their tenant couldn’t pay rent and Lazaroff’s $40,000 annual salary as an engineer wasn’t enough to cover the mortgage.
For years, a lawyer from Mortgage Guaranty stayed in touch with the couple to see if they could settle a debt of about $66,000 to the insurance company.
The pair eventually agreed to pay $500 a month until a reduced $20,000 debt was paid off in 2011. However, to this day, they remain renters, regretting buying a house without having a large enough down payment to avoid the insurance entanglement.
Other troubled borrowers like Galindo can only dream of putting their debt behind them. PMI obtained a judgment in court for damages in 2011 that had already ballooned to nearly $169,000 by 2013 with court fees and interest. The insurer is now trying to get money from the one-man CPR training company Galindo recently launched.
Galindo worries he’ll be in debt for the rest of his life: “It’s like a dark cloud over your head all the time."
NECIR interns Ryan Towey, Paula Sokolska, Andrea D’Eramo and Shan Wang contributed to this report.
Photo 1: Guillermo Galindo (Lauren Owens for NECIR) Photo 2: Mirian Pineda (Lauren Owens for NECIR) Photo 3: A complaint to attach wages filed in Guillermo Galindo's case (Joshua Eaton for NECIR)
