Groundbreaker or Grandstander?

Tuesday, Aug. 5, 2008 | Whether San Diego City Attorney Mike Aguirre’s latest lawsuit, which seeks to stop home foreclosures by Bank of America within the city limits, is potentially groundbreaking or just election-year grandstanding depends on who you ask.

Ask Judge Jan Goldsmith, his opponent in the November election, and you’ll get a diatribe on Aguirre once again overstepping the bounds of his office. City Council President Scott Peters rolled his eyes after hearing that Aguirre wanted to make San Diego a “foreclosure sanctuary.”

“I’d like to put my home in a ‘foreclosure sanctuary,’” quipped Peters.

But some lawyers and advocates who specialize in fair-housing issues say the suit, which specifically targets Countrywide — the notorious subprime lender acquired by Bank of America earlier this year — is a novel approach to dealing with the most acute housing crisis since the Great Depression. And they see Aguirre as a leader in the fight to save neighborhoods nationwide from the devastating effects of mass foreclosures.

“[Aguirre] is addressing a real issue that is out there,” said Bill Henry, a Denver-based attorney who defends homeowners facing foreclosure. “It has the possibility to establish a new baseline for dealing with the foreclosure crisis.”

Others say Aguirre should be applauded for tackling a critical issue, but question — given the size and complexity of the real estate market — whether the Countrywide suit will make a difference, even if it is successful.

Countrywide has been the target of a slew of lawsuits over the past year, including several by state attorneys general. But what makes Aguirre’s case different than just about all of the others is that rather than seeking restitution on behalf of wronged borrowers, he is trying to outlaw all foreclosures stemming from a specific type of mortgage product.

The suit accuses Countrywide of engaging in fraudulent, unlawful or unfair business practices by using deceptive tactics to sell exotic mortgages, and seeks an injunction that would force Countrywide to stop, or not start, foreclosure proceedings on borrowers with Countrywide mortgages that meet a certain set of criteria.

The criteria include mortgages with a 100 percent loan-value ratio, a teaser rate that is at least 3 percent less than the rate it would eventually reset to and a payment that would push the borrower’s debt-to-income ratio over 50 percent.

Aguirre’s goal is to force Bank of America to rework these mortgages by reducing the interest rate and/or the loan balance so borrowers who are in default can stay in their homes. He is preparing similar suits against Wells Fargo, Washington Mutual and Wachovia.

“If you have thousands and thousands of loans that were unlawfully originated, do you allow the people who unlawfully originated them to use foreclosure to consummate the transaction?” Aguirre said.

He sees his case as the catalyst, at least in San Diego, for enforcing the new foreclosure prevention law, which was passed by Congress on July 26, and signed by President Bush last Wednesday. Among many other things, the bill provides for new federally-backed mortgages for borrowers facing foreclosure.

However, in order for a borrower to get a new home loan underwritten by taxpayers, the lender holding the current mortgage must voluntarily agree to forgive a significant portion of the existing loan balance — down to 85 percent of the home’s current value. Aguirre says his suit provides the stick that forces lenders to agree to these workouts and will end up channeling borrowers into the program.

“There has to be something — some legal claim to direct people into the [government backed] refis,” Aguirre said.

Few will dispute that the subprime meltdown is a market failure, but there is widespread disagreement over how it should be handled. Many feel that the market should be allowed to correct itself, and that government intervention — whether through Congress or suits like Aguirre’s — will artificially prop up home prices and ultimately prolong the crisis.

And then there is the argument that government intervention creates a “moral hazard” for homeowners. People who would normally do everything in their power to make good on their debts might feel like its OK to stop paying their mortgage because Congress, or the city attorney, will bail them out.

“In our society it’s a moral issue,” said Mark Goldman, a local mortgage broker who also teaches real estate at San Diego State University. “What’s the difference if you borrow money from the credit card company, mom or the mortgage lender? There is an expectation in our society that you pay it back.”

While Goldman agrees that many subprime lenders — and Countrywide in particular — used unscrupulous methods to lure people into bad loans, he cautions against assuming that the majority of people facing foreclosure were victims of fraud. Many, he said, are simply victims of an economic downturn that may have been brought on by the real estate bust, but is not grounds for a court case.

“A lot of people understood the terms and conditions, but took on the loans in anticipation of large income gains,” Goldman said.

Goldsmith, who may inherit the case from Aguirre, takes the same view.

“There were people who misrepresented assets to get these loans,” he said. “I have seen these people in court, and I have not allowed them to skate on that.”

Aguirre, and others who support his lawsuit, acknowledge that some people may get help that they don’t deserve. But they say the foreclosure crisis has reached the point where it is not just affecting those who are losing their homes, but entire neighborhoods.

San Diego neighborhoods with a high number of foreclosures have not only suffered disproportionally in terms of price declines, but have had increased incidents of vandalism and theft, Aguirre said.

“If the house next door to my house is on fire, then I have to put the fire out so my house doesn’t catch fire,” he said. “We have to look out for the welfare of people who pay their mortgages, but are suffering from the spillover.”

Robert Gnaizda, co-founder of the Greenlining Institute, a Berkeley-based advocacy group for low-income communities, said Aguirre’s case hits a legal and political sweet spot. He cites overwhelming evidence that Countrywide and other lenders have engaged in fraud. And, he said, Bank of America is too concerned with its brand and nationwide image to come out looking like a bad guy in the biggest consumer issue of the decade.

“The suit is coming at the right time,” Gnaizda said. “If he would have filed it three years ago, I would have laughed. But he is doing what the people want and need — and the court may respect that.”

California Attorney General Jerry Brown sued Countrywide in June, alleging that the company defrauded borrowers and seeks restitution on their behalf. Attorneys General of Illinois and Florida, and the governor of Washington have filed similar suits over the past year.

But none of those suits do what Aguirre is trying to do, which is to put a stop to foreclosures already in the pipeline. So Aguirre has based his case largely on a suit filed last year by Massachusetts Attorney General Martha Coakley against the now bankrupt subprime lender Fremont Investment and Loan, which is based in Brea, Calif.

Filed under the state’s predatory lending law, Coakley’s suit alleges an array of unfair lending practices by Fremont, which since 2004 sold more than 15,000 mortgages to Massachusetts borrowers. In February, a Suffolk County, Mass. judge granted Coakley an injunction that prevents Fremont from foreclosing on any of its mortgages in Massachusetts, pending the outcome of the suit.

“I would not have done this, had there not been the Massachusetts case,” Aguirre said. “Trying to make what worked in a smaller case work in a larger case.”

However, while Coakley’s suit did stop more than 2,000 Fremont foreclosures from happening — at least temporarily — her spokeswoman said there is no evidence that it has kept other lenders from foreclosing or stabilized the state’s real estate market.

“We are hopeful that it has helped homeowners,” said the spokeswoman, Aime Breton.

And false hope might be all that Aguirre is giving San Diego homeowners, said Gary London, a local real estate consultant. London credits Aguirre for trying to do something about such a massive problem, but is skeptical about the suit achieving its intended result.

One big hurdle facing both Aguirre, and Congress with the new foreclosure law, is that that the lenders who originated the loans, often no longer own them. They are owned by investors ranging from hedge funds to pension funds. So, unlike in times past, it is not just a lender and a borrower sitting down at the table and trying to work things out, London said.

He likens it to the mortgage version of cities during the 1970s and 1980s declaring themselves “nuclear free zones,” in an effort to stop the worldwide proliferation of nuclear power.

“You can’t solve a problem that is essentially global by calling yourself off limits,” London said.

Please contact David Washburn directly at david.washburn@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.