Older Borrowers, Out in the Cold

In 2006, Carol Couts, a 66-year-old widow in Yuba City, Calif., was living in her home, payment-free, when a mortgage broker persuaded her to refinance her no-cost mortgage for one that exceeded her monthly income by more than $400.

She can't afford the payments, and unless her lender modifies the loan to make it affordable, she'll lose her home of 25 years. She's given away most of her furniture and her cat, and packed her belongings in cardboard boxes. "We've got nowhere to go," she says, referring to herself and her dachshund, Ollie.

As the government presses lenders to modify mortgages, a large subset of distressed borrowers is being left out: older homeowners on low fixed incomes. Many of them are now facing foreclosure, say legal-aid advocates and AARP attorneys, because they were sold loans they could never afford, often fraudulently.

Many of these homeowners had lived for decades in their home and had built up substantial equity, but had low incomes. This made them tempting targets for brokers who persuaded them to refinance their mortgages, telling them they could lower their monthly payments. Instead, many of these loans were loaded with fees and exploding interest rates and quickly became unaffordable.

These borrowers' incomes are often so low -- many are living solely on Social Security -- that few qualify for mortgage-relief programs. Even if lenders agree to reduce the interest rate and stretch out the repayment period, strategies at the heart of the Obama administration's antiforeclosure guidelines, "they won't get payments low enough," says Tara Twomey, an attorney with the National Consumer Law Center.

Hundreds of thousands of people in once-hot markets such as California's Central Valley fall into this camp, say housing counselors. Often the only way to keep these people in their homes is if lenders rescind the fraudulent loans or reduce the principal, steps most are unwilling to take.

The U.S. House of Representatives has endorsed legislation that would allow bankruptcy judges to modify or rescind loans even if lenders are unwilling. But lenders oppose the measure and the legislation has stalled in the Senate.

Meanwhile, people like Mrs. Couts are facing foreclosure. After her husband died in 2005, she took out a reverse mortgage, a deal available only to people 62 or older with substantial equity. It's actually a sale of your home to a bank, which then pays you a lump sum or a monthly income and receives the property after your death. The arrangement enabled Mrs. Couts to stop making mortgage payments so she could afford to remain in her home on her $913 a month in Social Security.

In 2007, she received numerous phone calls from a mortgage broker named Daniel Lewis. According to Mrs. Couts, he told her he was contacting seniors to warn them that banks were canceling reverse mortgages because they were unprofitable. She would have to refinance her home, he told her, or lose it. (This wasn't true; reverse mortgages generally aren't repayable until death.)

Mrs. Couts signed a document that said she could cancel within three days, and also signed documents that she thought were for a 30-year conventional loan with low monthly payments. The next day she saw that the application listed her income as $5,075 a month. She called Mr. Lewis to point out the error and to cancel the loan, but says he told her it was too late to change anything.

The broker had used a "no doc" application, which doesn't require proof of income. Many brokers used these stated-income applications when borrowers' incomes were too low to qualify them for loans. All of the other boxes for listing income and assets in Mrs. Couts's application, which was obtained by The Wall Street Journal, were blank.

Mrs. Couts's first statement showed she had an adjustable-rate mortgage with an initial interest-only monthly payment of $1,333. She soon defaulted, and Wachovia Corp. -- which had acquired World Savings & Loan, the firm Mr. Lewis worked with -- started foreclosure proceedings.

Wachovia -- now a unit of Wells Fargo & Co. -- has offered to change Mrs. Couts's loan to one with interest-only payments that begin at 66% of her monthly income, rising to more than 100% in a few years.

Citing customer privacy, a Wachovia spokesman declined to say whether the bank took fraud into account when it proposed the modification plan to Mrs. Couts. In a statement, Wachovia said that Wells Fargo has developed mortgage assistance plans to help Wachovia customers with Pick-a-Payment loans (the type Mrs. Couts has) and that the solutions "differ based on the customers' circumstances and what will be required to help them reach a sustainable mortgage payment."

Mr. Lewis couldn't be reached for comment.

During the mortgage boom, brokers commonly cold-called older homeowners. "I was inundated," says Floy Mae Bryant, 84, a retired telephone operator in Visalia, Calif., who had owned her home since the early 1990s. Loan records show Mrs. Bryant refinanced six times in less than three years using multiple brokers.

Serial refinancing was common among older borrowers, legal-aid lawyers say. Brokers pitched loans with low teaser rates, explaining the homeowner could simply refinance when rates reset. Yet borrowers like Mrs. Bryant didn't understand that each refinancing added thousands of dollars in fees to their debt.

Mrs. Bryant's last refinancing was in September 2005, just a month after her previous one. A mortgage broker placed her in a Countrywide Financial Corp. "option ARM," an adjustable-rate mortgage with a monthly payment of $1,545, barely affordable on her $2,310 Social Security and pension income. To make her mortgage payments, she drew on a $39,000 home-equity line of credit that the same broker encouraged her to set up.

One son helped her financially, but he died of cancer in November 2007; five months later, Mrs. Bryant's 65-year-old developmentally disabled son, who lived with her, also died of cancer. Mrs. Bryant missed her March 2008 payment, and Fannie Mae, which had bought the loan from Countrywide, sold her home in foreclosure in April. She moved to a rented trailer 20 miles away, returning two or three times a week to her vacant former home to water the roses.

Legal-aid attorneys challenged the foreclosure on the grounds that the underlying loan was fraudulently made. Fannie Mae is now in the process of setting aside the foreclosure and modifying the loan. "We intend to work with the borrower to reach a resolution that will allow her to remain in the home," says a spokeswoman.

Most defrauded homeowners get no help. Few people know they've been defrauded, and law enforcement generally investigates only when the fraud is perpetrated against lenders, not borrowers. While some legal-aid offices and AARP attorneys have sued lenders, they can take few cases -- and when they do, the cases can drag on until the homeowners die.

A recent case involved John and Vernice Green, an elderly couple in Sacramento, Calif. In late 2006 they signed up for what they thought was a reverse mortgage on their home of 32 years.

But the next month, they found they actually had an adjustable-rate loan more costly than the one they had before. The interest rate went to 11.4% from 6.25%, which increased their monthly payment to $2,106 from $794. Frantic, they tried to reach the broker, Melissa Villegas. According to legal-aid advocates who helped the Greens, she didn't return their calls and the Greens never heard from her again.

The couple soon defaulted. They eventually called Sacramento County Adult Protective Services, which in April 2007 sent a social worker, Heidi Richardson, to their home. Ms. Richardson says Mrs. Green was cognitively impaired, and could read only with a magnifying glass, and that Mr. Green was trying to take care of the home, despite having had both feet amputated. Ms. Richardson found him watering the lawn from his wheelchair.

She referred the case to the California Senior Legal Hotline, a nonprofit law office that has been swamped with foreclosure cases. Ralph Livingstone, 71, a volunteer attorney there, obtained the loan documents, which showed that the Greens had authorized the IRS to release their income-tax returns to the lender, and authorized the lender to obtain their employment and bank records.

Meantime, the application contained various fabrications. It noted that the Greens each had 16 years of education; in fact, Mrs. Green had only been through eighth grade, and Mr. Green had left in fifth grade in Mississippi during the Great Depression to help support his family.

The application also falsely said Mrs. Green was employed as an administrative assistant at Friendship Church in Sacramento. That helped inflate the couple's monthly income to $6,965, versus their actual income of about $3,000, from Social Security and Mr. Green's Teamsters pension.

The documents showed that the transaction costs totaled $20,127, of which $11,757 was for commissions and fees for the broker and lender.

Ms. Villegas's lawyer declined to comment. In an interview, the minister of Friendship Church, Rev. Donald Wright -- who, the Greens told advocates, had originally steered Ms. Villegas to them -- declined to say whether his church employed Mrs. Green. But he said "Melissa was a friend," and described Mrs. Green as financially sophisticated.

"The people who know the truth are me, Melissa and God," said Mr. Wright. "Under no circumstances would I do some illegal crooked stuff."

Mr. Livingstone investigated the loan transaction, hoping that if he could show it was fraudulent, the lender would be more willing to change the terms. To stall the foreclosure, he helped the Greens file a Chapter 13 bankruptcy, and continued to attempt to get the servicer to modify their loan.

"There are thousands of people being washed away in a flood, and we reach into the river and pull out one here and there, and keep them from drowning," says Mr. Livingstone.

Amid the continued stress, Mr. Green was hospitalized. He died Feb. 5, 2008, age 83.

In June, Ms. Villegas, 29, was arrested and charged with participating in a scheme to defraud lenders. The criminal complaint alleges that Ms. Villegas made false statements to investigators and that loan applications she arranged gave false occupations and inflated incomes. Ms. Villegas denied wrongdoing, and the case is pending.

Late last June, the servicer agreed to reduce the principal on the Greens' loan and convert it to a fixed rate with 7% interest. Mr. Livingstone called to tell the 80-year-old Mrs. Green the news. He learned she was in the hospital with kidney failure. She died a few days later, on the Fourth of July.

Write to Ellen E. Schultz at ellen.schultz@wsj.com