Predatory ‘wraparound’ mortgages seen as boon or ruin
by J.p. Lawrence, San Antonio Express-News—
At first, the house on Spanish Point Drive brought happy memories to Darin White. His daughter had been born in the split-level home, bought in 2008 for $134,501 in a developing neighborhood in El Paso.
White, a master sergeant in the Marines, bought the new house after an assignment to Fort Bliss. Then he said he received orders to move to Japan in 2011. He rented out the home until 2015, but then his renter lost his job and moved out around Christmas.
This left White in a pickle. He now lived in California and could not afford to pay two mortgages at once. He said he needed to either rent out or sell the El Paso house.
In January 2016, White said he got a letter from a man named Victor Dennis offering to help. He said he ignored it at first. Then three months went by and White fell further behind in his payments.
He contacted Dennis, who ran a company called KV Homes, which is unrelated to national home builder KB Homes. White said Dennis told him he’d take over the home through “creative ways” forbidden to the average Realtor.
Dennis, who declined to comment when reached by phone, wanted to use a so-called wraparound mortgage to sell the house.
It’s a form of financing that has surged in Texas since the foreclosure crisis. So-called “wraps” are most commonly used by sellers at risk of foreclosure and buyers who cannot get traditional financing. Wraps are legal in Texas and commonly used in commercial real estate.
Wraparound mortgages basically use one loan to pay another. In White’s case, he deeded the house to Dennis in exchange for $100 and an agreement from KV Homes to take over the mortgage, which had an outstanding balance of $122,000, according to their contract.
White now says he didn’t receive the $100, or any other money from the transaction.
In a typical wrap, the original mortgage stays in place and a middleman finds a buyer who pays for a second mortgage. This mortgage, typically at a higher interest rate, is “wrapped around” the first. If all goes well, payments from the second mortgage pay the first mortgage, and leave a little extra cash at the end of the month for the broker.
The problem is when middlemen such as Dennis don’t use money from the second loan to pay the first, putting it at risk of default. The bank may then foreclose on the home, destroying the seller’s credit and evicting the buyer. In these cases, the buyer can be ousted from the property without ever having missed a payment.
Defenders say wraps provide a chance at homeownership for those with bad credit. Critics say the current laws contain loopholes that can be exploited to defraud vulnerable homeowners like immigrants and service members.
Experts say wraps are offered all over Texas, including in San Antonio and Dallas. No one has researched their use here to determine the extent of the problem locally. Hundreds of foreclosures involving wraps have been recorded in El Paso and Austin, destroying credit and leaving hundreds of people homeless, according the nonprofit Texas Rio Grande Legal Aid.
White’s wraparound mortgage also imperiled his credit and forced him into an odd business partnership. He gave Dennis the go-ahead to sell the house in March 2016. After closing the deal, Dennis grew less responsive and wouldn’t answer his calls, White said.
Late fees on White’s mortgage continued to pile up after closing, indicating that KV Homes wasn’t making the payments as agreed. By May, White said he was five months behind on his home loan and still had no idea what had happened to the house.
That’s when Vanessa Bayan, a 35-year-old single mother from El Paso, called. Bayan said she had bought the home from Dennis for $135,000. Then she said Dennis disappeared with her $11,070 down payment.
On an emotional phone call with Bayan, White learned Dennis had sold the house without telling him or making good on the mortgage payments. He also learned Dennis had sold the home at least twice to two different people.
Shortly before the call, Bayan said another woman appeared at the home and said she, too, had bought the home from Dennis.
“I don’t know what’s going on,” Bayan said over the phone. “I need you to help me.’”
Cease and desist
It’s difficult to tell how many wraparound loans are issued in Texas. The state has issued at least six cease and desist letters to lenders in connection to wraparounds last year but there is no state database. Experts say wraps are most common in cities where people need to get rid of their homes. Cities like San Antonio, which have a steady supply of buyers eager to buy homes, don’t have as many of them.
Many wrap lenders picked up the trade after the foreclosure crisis in 2008. A large number are small-time operators who learned about wraps in a seminar or video, said Jay Beitel, a lawyer with a mortgage law firm in San Antonio.
“A lot of these sellers, in their minds, they’re just following a program to try to get rich in real estate, and they’re not intending to take the money and run,” Beitel said. “But all of a sudden, things don’t go the right way … and they don’t have the money to pay, and now the lender’s foreclosing, and the buyer is kicked out.” Wrap lenders target people already in financial trouble or on the verge of foreclosure, said John Henneberger of the Texas Low Income Housing Information Service.
“We see low-income people getting in trouble a lot,” Henneberger said, “ending up with people offering them a false lifeline to get out of a loan that they can’t afford.”
This is how Dennis advertised his services in an online listing for KV Homes. “Are you behind on your mortgage and about to lose your hard won equity? Sell your home to Victor Dennis and be done with that burden,” the ad read.
In a video posted online, Dennis pushed his method of finding distressed homes: “What I look for: people with problems. Motivated sellers.”
In El Paso, the typical victim was a military family who needed to sell their home quickly, said Veronica Carbajal, a lawyer with the Rio Grande Legal Aid. In the past two years, 30 percent of their new cases involved military families who needed a quick sale. Military families move three times more frequently than civilians and are uniquely vulnerable to mortgage fraud. All five of the cases Legal Aid brought against Dennis involved military families, Carbajal said.
Fort Bliss tells troops to steer clear from the roadside signs that read “We Buy Homes Fast,” according to a statement by the garrison public affairs office. The statement said the base offers home buying and financial literacy classes every few months.
Jocelyn Chevalier, an Army staff sergeant in Norman, Oklahoma, said she granted her home at Mesquite Bush Drive in El Paso to Dennis in September of 2014. With only 90 days notice to move, she needed to sell her home on short notice. When she arrived in Oklahoma, however, Chevalier said she realized Dennis kept the house in her name longer than she expected. Dennis soon stopped answering her texts, the house fell into foreclosure and her credit score dropped.
“He was taking advantage of soldiers,” Chevalier said. “He knows when you leave, it’s not going to be easy for us to go back and forth to El Paso.”
Those who use wraps to buy homes often can’t buy a home any other way
Jose Luis Plancarte, 49, said through a translator that he bought his home in Austin from a wrap lender because he had no credit, no Social Security number and needed a house fast. He now worries in an emergency that he may lose his home.
Many in the Dove Springs area of Austin lost their homes and had to move away after a Halloween flood in 2013. “There were people living in tents,” Ofelia Zapata, a local advocate with Austin Interfaith.
The flood left 100 low-income Spanish-speaking homebuyers who purchased homes using wrap mortgages unable to file insurance claims because their homes were still in the name of another owner, according to Legal Aid.
“People can’t afford to buy a house. A lot of them got to buy a house somewhere,” said Legal Aid lawyer Robert Doggett. “There’s going to be people out there trying to sell it to them, even if it’s cutting corners.”
Many buyers are evicted from the homes before realizing the person they’re making payments to isn’t paying the loan, Beitel said. Some of them aren’t even aware that there’s another loan.
Some wrap lenders try to hide their transactions, Beitel said. If a bank finds a house has been resold without permission, they have the right to demand immediate repayment. He said wrap lenders hope to avoid this by not properly recording the deed, leaving the original seller on the hook.
“There is misery out there that’s being caused by these loans, by non-reputable folks and folks who just didn’t know any better,” said Brian Engel, who works for a firm he said does about 40 percent of foreclosure cases in Texas.
Clues in the garage
When Bayan first saw the split-level home on Spanish Point Drive, she said she could see it was a bit run-down but still felt a connection. The house needed love. She wanted to buy the home and fix it up for her and her three children.
The problem was her credit, which wasn’t good enough for a traditional loan, she said.
She said she found Dennis and KV Homes on Craigslist. Dennis didn’t have a business card, Bayan said, but he seemed laid-back and genuine. Dennis told her he was there to help people like her, she said.
Dennis told her she could have the house on Spanish Point for $135,000 with a down payment of $11,070, Bayan said. KV Homes financed the remaining money with a 25-year loan at 5 percent interest and a monthly payment of $1,070, according to the mortgage contract. She gave Dennis the down payment in two cashier’s checks and moved in at the end of April, she said, adding that the entire process took about a week.
Something was amiss when she tried buying homeowners insurance, she said. Theresa Ochoa, the agent, said the contract didn’t make sense.
Then a title company told Bayan that a man named Darrin White was listed as the owner — not Dennis, who wouldn’t call her back, she said.
In the garage, Bayan found for-sale signs with a California phone number on them. The number was to a California Realtor White hired before Dennis. In another bit of sleuthing, she found a letter in the trash with White’s email.
Then she received a knock on her door. It came from a very angry high school classmate of hers. Brenda Garcia, 35, said she also bought the house from Dennis. Garcia said she gave Dennis $2,000 as part of a $10,000 down payment on the house at Spanish Point. When Dennis began to ignore her calls, she said she showed up at the house. Garcia said she recognized Bayan and wondered why her furniture was in the house.
“We ended up purchasing the same house, a week apart,” Garcia said.
Bayan and Garcia weren’t the only homeowners deceived by Dennis, according to Legal Aid attorneys and records with the Texas Department of Savings and Mortgage Loans.
The El Paso man had bought and sold numerous properties without settling the mortgages already on them, according to a cease and desist letter from the agency. Dennis “may have not fully disclosed these ‘wrap-around mortgages’ to the consumer’s buyers,” according to the July 2016 letter.
The department also found Dennis issued loans and received loan payments without a license. In “numerous cases,” Dennis failed to pay the first mortgages, which led to foreclosure and “eviction of those who had bought homes from him,” the agency concluded.
Dennis lost three separate civil fraud cases in default judgments in El Paso in 2016 with another pending.
In one case, Juan and Maria Esquivel alleged they had bought a home from Dennis for $157,000 in 2015. They paid $1,450 each month to Dennis. When they asked Dennis how much remained on their balance, they said Dennis stopped talking to them, according to a 2016 suit in El Paso district court. They said they then learned the title to their home had not been transferred to their names and that there was no record of them purchasing their home.
In two other cases, Ashley Thomas and Rubin and Cynthia Crespo said they sold their homes to Dennis but then received no credit. In each of the three cases, judges determined Dennis had made false statements with reckless disregard of the truth.
Bayan said she was a bit paranoid when she talked to White for the first time.“I thought him and Victor Dennis were in cahoots,” Bayan said.
White, meanwhile, wondered who the woman was.
“This woman I’ve never met, she tells me this outlandish story,” White said. “And she thought I was in cahoots with Victor Dennis.”
When the middleman in a wraparound disappears, the seller and buyer often find themselves left behind. When they meet, the two often suspect each other of being complicit in the scam, said Albert Nabhan, a lawyer in El Paso who has represented clients in wraparound cases.
“It happens a lot. The buyers are furious they didn’t actually buy a house,” Nabhan said. “The seller is furious because his family is paying for two houses.”
As White and Bayan spoke, they quickly realized Dennis had left both of them in a predicament. White needed to pay for the house but had no way of ensuring Bayan kept up those payments.
“At any point, she could say, ‘Screw it, I’m out of here,’” White said. White could try to kick Bayan out. Then he’d be back to where he started: at risk of foreclosure.
Bayan, meanwhile, had fallen in love with the house. She had already invested money on renovations and repairs.
Their fates were now tied together, united without their consent by Dennis and the house at Spanish Point Drive.
Dangerous level of trust
Even if done legally, housing advocates argue, wraps require a dangerous level of trust among multiple parties.
“A wrap, it’s just a time bomb ready to go off,” Henneberger at Texas Low Income Housing said. “You don’t want to rely on someone else making payments.”
Douglas Cash, who has sold homes in San Antonio via wraps, likens the relationship to two people in a rowboat. “Everyone has to row and everyone has to pull their own weight,” Cash said. “It’s a tremendous vehicle to improve people’s’ lives if each party does not abuse the system, if each party says what they’re going to do.”
Cash said he has sold 10 homes using wraps, four of which were in foreclosure. The wrap loan business is vulnerable to fraud, Cash said, but he said he uses a note collection company to avoid problems. Cash said he usually finds a way to cash out of the original loan with the new owners.
“It’s just a way to get someone into a home, who might have had hard times,” Cash said. “I found a way to make money on the side and help people and basically it’s a win-win for everybody.”
For buyers, however, a wraparound can mean constantly living under fear of foreclosure. “If you have a choice between living under a tree or getting a wraparound, go live under the dang tree,” San Antonio retiree John Moreno said.
Moreno lives in the San Antonio home owned by Cash. As Moreno walked through his home, he noted the improvements he made to the house, the new carpeting, the renovated bathroom. He said Cash has the right to foreclose on him and take back the house, improvements and all, a clause found in many wrap contracts.
Moreno said he didn’t know he bought his home in the Camelot II neighborhood under a wrap loan. He said he did not meet Cash, the home’s original owner, until he made an insurance claim.
Cash did nothing illegal, and he would not have been able to find a home otherwise, but Moreno still said he feels like a glorified renter.
“I don’t have a problem with him. He seems like an honest guy,” Moreno said. “I have a problem with the system as it’s set up. He’s got all kinds of rights that I don’t …You have no control.”
Cash disputed the idea he held more power in the wrap loan. “There’s a risk on my part,” Cash said. “And that risk is, if they don’t make payments, that payment still has to be made every single month.”
Like Cash, other wrap lenders argue they help people in trouble.
Phill Grove, an Austin Realtor who teaches seminars on creative financing, said wraps helped his father-in-law buy a home with less than perfect credit.
“Eliminating wraparound mortgages in Texas would harm Texans,” Grove said at a legislative hearing this spring. “Sellers that need these to avoid foreclosures, buyers who also need the option to buy when they might not qualify for traditional financing.”
Wrap loans can be done safely, according to Austin-based real estate lawyer Alan Ceshker, who said he closes between 15 and 30 wraps a month. Like other wrap lenders, Ceshker began focusing on wraps in 2008. There are roughly 100 other firms like his, he said.
“Hundreds and possibly thousands of foreclosures would occur if this tool is not available to distressed sellers,” Ceshker said.
Texas lawmakers attempted to restrict wraparound loans this session. None passed, although a bill by Sen. Judith Zaffirini, D-Laredo, came close. Her bill would have subjected lenders to a felony charge for wrap loan fraud. Zaffirini pushed to require lenders to get permission from the bank holding the original loan before issuing a wrap. Prosecutors familiar with the topic noted the difficulty of proving fraud.
Lawmakers also aimed to prevent small-time lenders from creating shell companies to prevent oversight from the state. Currently, Texas allows an exemption to small-time lenders. They do not have to register if they issue fewer than five mortgages a year, but some lenders use shell companies to exploit this loophole, Sen. José Rodríguez, D-El Paso, said.
Proponents of the bills said they plan to submit again next session.
Bayan and White figured out a way to make things work when they realized they were stuck in a wraparound.
Bayan, who recently had a fourth child, is making payments until she can secure a loan. The money does not go to White. It goes directly to his mortgage company. She hopes she can build her credit and eventually buy the house outright.“I want to be free and clear from the house,” White said. “Whenever she’s ready or has the cash, or gets the loan to buy the house, I’ll sell for how much I owe the bank. I think that’s only fair.”
“We have something that’s functioning. It’s not ideal, it’s not how you’re taught in school, but it’s something,” White said. The man who inadvertently introduced them, Dennis, continues to advertise home sales in the El Paso area.
“We’re financially married,” White said. “We met through the scam of Victor Dennis.”