Penalizing Homeowners

Look, up in the sky! It's the Airship Liberty, one of two blimps in Ameriquest Mortgage Co.'s inflatable fleet. The other is called Airship Freedom.

And wasn't that the Ameriquest logo -- the one with the Liberty Bell facsimile -- on the All-Star Game ballots during the 2004 baseball season? Sure was. It often showed up, too, when the highlight reels took us to Ameriquest Field in Arlington, where the Texas Rangers play.

And on Feb. 6, we'll be treated to Paul McCartney headlining the Ameriquest Mortgage Super Bowl XXXIX Halftime Show. Ameriquest reportedly paid $15 million to snag the world's most prestigious advertising slot. That's quite a catch for a California company that started out in 1980 as Long Beach Savings and Loan. Back then, the firm was a bit player in the then-tiny subprime lending market, which makes high-fee, high-interest loans to people with tarnished credit or irregular incomes. The halftime sponsorship is part of what Ameriquest Vice Chairman Adam Bass has called "our long-term vision ... to become the lifelong mortgage company of every homeowner in America."

Locally, Ameriquest made at least 562 mortgages in Allegheny County in 2004, up from 337 in 2003. Nationally, its portfolio of loans has grown 27-fold since the end of 1996, including tripling in the past three years, to the point where the company now holds about 500,000 mortgages. It's tops in the fast-growing subprime lending market, and is ranked eighth among all mortgage companies. According to Inside Mortgage Finance magazine, the company dished about $55 billion in loans during the first nine months of 2004 alone. And just as Congress starts mulling legislation to curtail unfair "predatory" lending practices, Ameriquest has claimed another title: top political contributor in the mortgage industry, spending nearly $5.6 million to influence November's elections.

The lending, political giving and marketing blitz "feels like it's an attempt at legitimization. 'We're mainstream! We're at the Super Bowl!'" says Kevin Stein, associate director of the California Reinvestment Coalition, which has studied and criticized Ameriquest's practices. Legitimization is fine if the loans are fair, he says, but he fears some Ameriquest borrowers may get unfavorable terms "that they don't actually deserve."

That's certainly how Curt Hildenbrand feels, after being driven to bankruptcy by what he views as an Ameriquest agent's bait-and-switch play. Same for James Mazza, an Ameriquest borrower who is about to lose his home in a foreclosure sale. Ditto for Renee Schopper, who describes being rushed into a pricey Ameriquest mortgage she can barely afford on the eve of a scheduled hysterectomy. "There's my mortgage," says Schopper, as she holds a sheaf of papers and nods toward the dark TV, "right there paying for the halftime show."



Curt Hildenbrand wanted to come home and put down roots. He grew up in Bellevue, but during the 1990s he and his family went wherever his work as a hazardous-waste remediation manager took him. In 1999, with their daughter then 9 years old, he and his wife decided to return to Pittsburgh, and found a three-bedroom brick walk-up in Ross that they moved into on a rent-to-own basis. In early 2002, they decided to buy.

"Our credit wasn't great," Hildenbrand says. He'd suffered several heart attacks, which set the family back financially. Ameriquest, though, promised to make them homeowners for about the same price they were paying as renters, he says. "We were paying $700-and-something [in rent], and [the Ameriquest agent] said we'd be paying something like that" on the mortgage, Hildenbrand says. The loan agent even said they could get some cash out of the deal, he says.

When closing day arrived, though, the mortgage papers told a different tale. The monthly payment on the $99,000 loan would be $962 -- about $200 more than their rent payment -- and didn't include taxes and insurance. Ameriquest would pocket six different fees totaling $4,281. And instead of getting cash, Hildenbrand would have to put down $2,618, wiping out the family's savings. "At one time, our credit was good enough to get money back, and then suddenly it wasn't," Hildenbrand says. He almost balked at closing. "I didn't want to go through with it, but my wife wanted to do it, and my daughter wanted to do it. ... Owning a house is a big thing, and you get excited."

Neither Ameriquest's Wexford branch nor its Orange, Calif., headquarters returned calls, and the company's public-relations agency declined to comment. Ameriquest execs "don't typically interact with reporters, or if they do, they don't say much," according to trade-industry publication National Mortgage News.

Had the Hildenbrands gotten a mortgage at then-current bank interest rates of 7 percent, instead of the 11.3 percent rate Ameriquest gave them, their monthly payment would have been $300 less. That's a difference of $108,000 over the course of a 30-year loan. Unfortunately for the Hildenbrands, the cost could be more than that. After two years at 11.3 percent, their interest rate can start rising, based solely on the rates bankers in London charge each other on short-term loans. The Hildenbrands' rate can potentially reach 17.3 percent, and their monthly payment could hit $1,400. The rate can never go below 11.3 percent.

Hildenbrand says Ameriquest's loan officer told him he could refinance into a lower-rate loan after a year -- a recollection that matches those of several other borrowers interviewed by City Paper. But should Hildenbrand try to escape the interest-rate increase by refinancing, he could hit three barriers. The first is a prepayment penalty of around $5,000 that kicks in if he tries to pay off the loan during its first three years. (Such penalties are rare in bank loans, but common in subprime loans.) The second is the fact that the loan may be bigger than the value of the house, which Allegheny County tax assessors say is worth $91,000. Most lenders won't lend more than the value of the property. The third is his credit rating, which was spotty before Ameriquest, and now includes a foreclosure and a bankruptcy.

In January 2003, Hildenbrand was laid off. Throughout that year and early 2004, he worked sporadically, until last summer's Florida hurricanes created work in the Sunshine State. For a while he paid the mortgage, but that extra $300 a month in interest didn't help. "You can't pay your gas. You can't pay your light. Your phone gets shut off," he says. He asked Ameriquest for some leeway. "There was no working with them," he says. In October 2003, he could pay no more. That winter their furnace broke down, and for a month while they scraped together money to fix it, the Hildenbrands relied on their living-room fireplace to heat the house.

Ameriquest filed for foreclosure in February. The Hildenbrands subsequently filed for bankruptcy reorganization. They're now paying their mortgage through bankruptcy court. They say their interest rate and payment have gone up, but they're not sure how much, since the court handles that. Their dream of setting down roots hasn't gone as planned. "We never had to go through this in our lives," Hildenbrand says, "and now our daughter has to go through this."



The combination of high payments, adjustable rates and prepayment penalties that snagged the Hildenbrands is Ameriquest's "bread-and-butter product," says Stein, of the California Reinvestment Coalition. "With these Ameriquest loans, these [borrowers'] housing payments are going up. ... In a couple of years, people are going to be hurting."

City Paper used Ameriquest filings with the Securities and Exchange Commission to track the terms of 90,820 Ameriquest mortgages made between July 2003 and November 2004. The analysis shows a pattern of lending to the hilt, ensuring payments will only go up, and penalizing those who try to escape their loans.





44 percent of the borrowers got mortgage payments that ate up 40 to 55 percent of their incomes. "When people get into the 40s, they're generally on thin ice," says Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. Seven percent were paying more than half their incomes to Ameriquest. "For most people," says Fishbein, "there would be no margin for error if they were in that category."

80 percent of the borrowers got interest rates well above industry averages, despite Ameriquest's claim in press releases that it's "moving beyond our nonprime roots" toward prime-mortgage lending. 12 percent got interest rates that started out 3 to 6 percentage points above average mortgage rates at the time. On a $100,000 mortgage, those high interest rates add $200 to $400 to the monthly payment.

73 percent of the mortgages were adjustable-rate loans that can go up -- usually by as much as 6 percentage points -- but can never dip below their original mark. That's in contrast with bank adjustable-rate mortgages, which can typically dip below their original rates if average interest rates fall. Combined with high debt levels, upward adjustments are "really just a prescription for financial disaster," says Kevin Byers, an Atlanta-based forensic accountant who testifies for government agencies and borrowers' attorneysin many unfair lending cases.

66 percent of the loans had prepayment penalties that kicked in if the borrower tried to sell the house or refinance during the first three years. Whether it's through rising interest rates, prepayment penalties or closing costs on a new loan, most of the 90,820 Ameriquest borrowers will take a financial hit during their loan's first three years.

High adjustable rates, high debt levels and prepayment penalties appear to add up to muscular profits for Ameriquest. It's a privately held company that doesn't reveal its profits, but National Mortgage News has estimated that Ameriquest earned about $1 billion in 2003 by writing or handling about $61 billion in loans. By comparison, the nation's biggest mortgage lender, Countrywide Finance, earned $2.3 billion by writing or handling about $1 trillion in loans. In other words, Ameriquest's business model may be seven times more profitable than that of the industry leader.

For borrowers, though, Ameriquest's bread-and-butter loans "could be trouble," says Keith Ernst, a researcher at the North Carolina-based Center for Responsible Lending, a nonprofit advocacy group. "Borrowers within this situation would find their finances stretched to the breaking point, and may not be able to refinance to take advantage of other opportunities," he says.

Others agree that such loans can be tough on borrowers, but feel they should still be available. "Say out of 100 such loans, 40 were the best option available to the borrower. The other 60 [borrowers] would be better off staying put, or they had a better alternative but didn't know it," says Jack Guttentag, a professor emeritus of finance at the University of Pennsylvania's Wharton School of Business who holds forth on mortgages at www.mtgprofessor.com. "Yes, the 60 add up to a lot of heartache and hardship, but would we want to deprive the 40 of an option that made them better off? I wouldn't."



One lousy month cost James Mazza his home.

A handyman and father of three who started selling houses in 1994, Mazza decided in 2000 that he should finally buy one himself. He spotted a brick three-bedroom home with a big porch in cozy West View that needed a little work. The price was right at $63,000. But because his income as a real-estate agent and handyman was irregular, and he had a bankruptcy in 1995, Mazza turned to a subprime lending company for a mortgage. After two years he decided to refinance. "This girl from Ameriquest called me," he says. "I said, 'What can you do for me?'"

What Ameriquest did was give him an $86,000 adjustable-rate mortgage at 12.1 percent interest, with the potential to rise to 18.1 percent. A mortgage that would have cost $561 a month at bank rates instead started out at $895 a month, and had the potential to rise to $1,307 a month. A prepayment penalty locked him in for three years.

Of course, Mazza probably wouldn't have qualified for a conventional bank mortgage. "[Subprime] loans are priced somewhat higher than prime loans due to the higher risk levels and higher servicing and [legal] compliance costs," notes the Coalition for Fair and Affordable Lending, which represents subprime lenders, on its Web site. The question is whether the "higher risk" in subprime loans stems mostly from the borrowers, or from the lenders' hunger for profits.

The experiences of some nonprofit lenders suggest that subprime lending doesn't have to involve sky-high interest rates. Every year Neighborhood Housing Services of Chicago makes about 400 to 500 mortgages, totaling $35 million, to borrowers who don't qualify for bank loans. Before making a mortgage, they have the borrower attend an eight-hour class on credit, and provide one-on-one debt counseling where needed. Then they make a fixed-rate loan, at about half a percentage point more in interest than bank loans, with no prepayment penalties, that consumes no more than 42 percent of the borrower's income. "Our sense is that this population [of borrowers] is on the borderline, and can least [easily] manage risk," says Bruce Gottschall, executive director of NHS of Chicago. "Why put more risk on the borrower?"

Apparently, such borrowers aren't as risky as commercial lenders might suggest. Of about 1,500 first-lien mortgages NHS of Chicago made in the past six years, just 8 went to foreclosure, according to Jim Wheaton, NHS of Chicago's associate director for lending and home ownership services. That's almost identical to the half-percent foreclosure rate of prime loans nationally. By contrast, the Mortgage Bankers Association of America reported in December that 4 percent of subprime loans were in foreclosure.

Ameriquest's filings with the SEC show that as of mid-2004, exactly 9,504 of its mortgages were in foreclosure. That's 2 percent of its borrowers. That foreclosure rate "would be higher and could be substantially higher," according to Ameriquest's filings with the SEC, except that many of the company's loans are too new to have had a chance to reach foreclosure. As of June, two-thirds of Ameriquest's loans were less than 18 months old.

The ranks of the foreclosed have since grown by at least one: Mazza. In December 2002, bad weather shut down the real-estate business. "There was two feet of snow on the ground. I was in the house, couldn't do anything," he says. For a month, his income dried up. "I wanted to give [Ameriquest] a half a month payment, and they didn't want it. They said, 'You either make the whole payment, or pay nothing.'"

Mazza missed two payments and a property-tax payment. Ameriquest paid the taxes and tacked on interest and late fees. It then refused to take regular monthly payments. Eventually the company wanted $9,000 -- the equivalent of 10 months' payments. Mazza tried to catch up in $3,000 increments, but was late with the third catch-up payment. Ameriquest filed for foreclosure in July, adding $11,530 in interest, fees and legal costs to his loan's balance, not including the taxes. Faced with a prepayment penalty, a balance bigger than his home's value, and decimated credit, Mazza had no way to refinance or sell the house.

Ameriquest is in the final stages of taking the house. Mazza, his wife and their youngest daughter now live in a two-bedroom apartment owned by a relative. "I'm not losing much, because there wasn't much equity [in the house]," Mazza says. "Just the way they treated me was shitty."



"For the past 10 years or so, there've clearly been large subprime lenders with public faces," says Margot Saunders, managing attorney for the National Consumer Law Center, which pushes for consumer protections. Buying the Super Bowl halftime show sponsorship for a reported $15 million -- and topping America Online's $10 million payment last year -- is a logical extension of their growth, Saunders says. "It may be more, it may be bigger, but it's part of the same continuum," she says. "The problem is the political prominence of the people who are making the loans."

As subprime lending has grown more than ten-fold in 10 years, and reports of predatory lending have multiplied, borrowers who feel mistreated and consumer groups that sympathize have descended on many state houses and city halls. As a result, 37 states and 14 municipalities have passed anti-predatory-lending laws, according to Butera & Andrews, a legal and lobbying firm that represents the subprime lending industry's Coalition for Fair and Affordable Lending.

Many of the state laws -- including Pennsylvania's -- do little more than reiterate the modest consumer protections that are already in federal laws, while stripping cities of any power over lending. Others, like those in North Carolina, Georgia, New Jersey, New Mexico and Massachusetts, have won praise from consumer groups for curbing subprime lending's most expensive practices. Those states' laws have been criticized, though, by lenders who say the laws cut off credit to those most in need. "There's a segment of the market [of potential borrowers] -- 10, 15 percent, [and it] can be more depending on the jurisdiction -- that can be wiped out" by lending restrictions, says Wright Andrews, a partner at Butera & Andrews and executive director of CFAL. "The industry doesn't like to broadcast this," he adds, "but some loans are costing more" because of state regulations.

Andrews says he doesn't represent Ameriquest, and professes having "no idea what their practices are." There's little doubt, though, that the biggest subprime lender has his ear; his wife, Lisa, is Ameriquest's senior vice president for government affairs.

Andrews says CFAL hopes the new Congress will pass a law that wipes out all state and local anti-predatory-lending laws, and replaces them with a federal bill. He'd like to see a federal law that presumes people can pay up to half of their income to the mortgage company, and allows lenders to "go higher [than 50 percent], but you have to justify it." Prepayment penalties would have to be optional and well explained, and would expire as soon as the interest rate on an adjustable-rate loan increased.

If such a law were passed, Ameriquest would have to modestly adjust its practices on future mortgages: It would have to carefully document loans that demand more than half the borrower's income, and include shorter-term prepayment penalties.

Consumer groups say that's not enough. They're backing a bill by North Carolina congressmen Brad Miller and Mel Watt, both Democrats. It would restrict more high-cost loans than are currently covered by federal law, and compel borrowers to consult with independent credit counselors before taking on expensive mortgages. States would be allowed to add more consumer protections. Consumer advocates aren't optimistic, though, that the Republican-controlled Congress will get behind a bill that big lenders would oppose. "This is not a very [consumer-]friendly Congress," says the National Consumer Law Center's Saunders.

Instead, it's likely that Ohio Republican Robert Ney and Wilkes-Barre Democrat Paul Kanjorski will soon introduce a proposal that would eliminate state and local anti-predatory-lending laws, says Kanjorski. "We're trying to do that in such a way that it would include some consumer protections," says Kanjorski. "I can't get particular with you, because it's not finalized."

The pairing of Ney and Kanjorski worries consumer groups. In 2003, Ney authored a bill that would have quashed state and local anti-predatory-lending laws, while handing lending regulation to an industry-dominated "Consumer Mortgage Protection Board." The bill never moved out of committee. Kanjorski, though, could give a veneer of bipartisanship to a pro-industry bill, some consumer advocates say privately.

Consumer groups are also worried about Ameriquest's influence.

During the 2004 election cycle, the company's executives and its political action committee gave $594,250 to federal candidates, according to the Center for Responsive Politics, a Washington, D.C.-based campaign-finance watchdog group. That was tops among mortgage lenders, and 83 percent of it went to Republicans. "This is a lot of money," says Steve Weiss, a spokesman for the Center for Responsive Politics. "Any time you're the biggest giver in a particular industry group -- in this case mortgage bankers -- you're going to stand out in Washington."

The company can likely claim the ear of President George W. Bush. Its chief owners, Roland and Dawn Arnall, collectively attained the rank of "Ranger" in the Bush campaign by rounding up at least $100,000 in contributions each, according to Texans for Public Justice, which monitors the president's fund-raising. In addition, Dawn Arnall gave $5 million to Progress for America, an ostensibly independent group that focused on re-electing Bush. About half of the $35 million Progress for America spent reportedly went for a television ad in which the daughter of a Sept. 11 terrorist attack victim told of being hugged by Bush. It was reportedly the biggest political ad buy in history.

Such spending power could overpower consumer complaints, resulting in a law that does little or nothing for borrowers, says the Consumer Federation of America's Fishbein. "The financial-services industry [executives] are major contributors to political campaigns. There's only a handful of consumer advocates arrayed against them," Fishbein says. "Public attention to the issue is the only way we can prevent a total disaster."



Renee Schopper is a data clerk at a car dealership, and her husband, Russell, is a math teacher at a private school. The McCandless family is solidly middle class, but with three daughters, ages 10 to 14, money's always tight. By early 2004, the family was $4,400 behind on its property taxes, and it figured banks wouldn't help, since Russell had a bankruptcy in his past. Renee Schopper called Ameriquest, wrongly thinking they were a local company. "When I called them, it was like, 'I'm sure we can help you,'" she says.

Schopper mentioned to the loan officer that she was having a hysterectomy on Feb. 27. He scheduled the closing for the day before. She had mixed feelings about the timing. "Just by some freak chance if something would've happened to me [during surgery], I knew the taxes would be paid," she says. On the other hand, she wasn't sure the $172,800 mortgage was a great idea for a home the county says is worth $138,800. When she saw the terms -- a 9.75 percent interest rate that can rise to 15.75 percent, and a $1,485 monthly payment that can only go up -- she got scared. "I said, 'I don't know if I should go through with this. I don't know if I can afford it.' ... He said, 'Renee, this is the best thing you can do,'" Schopper says. "I remember sitting in [the loan officer's] office, crying because I wasn't sure that I should do it. And he smoothed me into it. And to this day, I could kick myself."

Shortly after Schopper arrived at the hospital the next day, she got a call from her husband. Turns out Ameriquest was withholding payment pending some further documentation of his retirement savings. The delay sent checks bouncing, costing the family at least $400 in fees, says Schopper. When they complained that the fees left them with no grocery money, Ameriquest sent $200 in grocery-store gift certificates.

Now they're struggling to make their monthly payments. "It doesn't seem very manageable anymore," Schopper says. Had they been able to get a similarly sized bank loan, at then-average interest rates of 5.7 percent, their monthly mortgage payment would be $482 lower. A $6,000 prepayment penalty effectively prevents them from refinancing until 2007. If her payment rises in the meantime, she says, "I'm going to be extremely worried."

Schopper's Ameriquest experience, coupled with the company's advertising blitz, have taken some of the fun out of watching baseball and football, she says. "I'm paying all this money to a mortgage company, and look what they're doing with it," she says. "Who's reaping the benefits? Not me."

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Anatomy of a Foreclosure

A foreclosure filing like this one is a lender's first step toward taking a house from a borrower who has missed payments. It often results in the auctioning of the house to cover some or all of the loan. As of June 30, 2004, there were 9,504 Ameriquest borrowers nationwide who were subjects of foreclosure filings, but hadn't yet turned over their homes.

This foreclosure complaint, against Brian and Marilyn Rotharmel of McKeesport, was filed Dec. 2.

1 -- Ameriquest Mortgage Co. hires this subsidiary of a German-based multinational bank to handle the giant pools of mortgages it creates -- and, where necessary, to foreclose. Foreclosures are rarely filed under Ameriquest's own name.

2 -- Address of Ameriquest's loan-servicing office, from which the foreclosures are actually managed.

3 -- In May 2003, the Rotharmels refinanced their home, getting an Ameriquest mortgage that started at 8.99 percent interest, but could rise as high as 14.99 percent. The $651 monthly payment was manageable, but didn't include taxes or insurance. When Ameriquest tacked on those costs, the payment rose by nearly $300 a month, says Marilyn, prompting them to try refinancing.

4 -- The Rotharmel home is worth $43,200, according to Allegheny County assessors, but Ameriquest loaned the couple $81,000. Another lender refused to refinance them, saying they "can't get your house appraised for what Ameriquest appraised it at," Marilyn says. While trying to refinance, Marilyn says, they missed two payments to Ameriquest. The company then demanded $2,720 and refused to take partial payments, she says.

5 -- Ameriquest now demands $89,460 in principal, interest and fees -- twice what the county says the Rotharmel home is worth. If Ameriquest doesn't get the money, the company's legal filings indicate, it wants the property sold to the highest bidder at a sheriff's sale.

6 -- This is the name of a "pool" of about 4,800 mortgages that Ameriquest sold to investors in 2003. Ameriquest sells about a dozen such pools of loans a year. The description of this loan pool that Ameriquest provided to investors noted that the loans "experience rates of delinquency, foreclosure and bankruptcy that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner."

7 -- Since Dec. 2, the family has retained an attorney, and is considering bankruptcy, though that would not cancel the mortgage. "We want to keep our home," says Marilyn, "and we don't know what else to do."