One takes a certain liberty in treating an extreme anecdote as indicative of a pattern. But in the context of the ongoing residential mortgage crisis, it is justifiable. The Washington Post thinks so. The paper’s March 4 print edition features a lengthy cover story on a suburban Maryland couple, Keith and Janet Ritter, who readily admit to their freeloader status. The Ritters in 2006 bought their home for nearly $1.3 million with almost no money down and, in the ensuing years, haven’t made a single mortgage payment, having adroitly used state law to avoid foreclosure and eviction. “We don’t believe in living for free,” says Mr. Ritter, without irony. He and his wife, after interminable legal wrangling, face eviction. Yet even now, they’re mounting a last-ditch effort to get their property back. They’re an extreme example of what’s become a common syndrome across the U.S.
National Legal and Policy Center has argued on several occasions that the mortgage meltdown, the recovery from which remains painfully slow, was an accident waiting to happen. Armed with the strange assumption that Americans have a right to own a home as early in adult life as possible, federal policy, starting about two decades ago, aggressively ramped up pressure on mortgage lenders into lowering underwriting standards so as to accommodate marginally qualified (if even that) applicants. Congress and federal regulatory agencies, feeling intimidation from “civil rights” groups to boost loan volumes to nonwhite neighborhoods and individuals, also browbeat Fannie Mae and Freddie Mac into lowering standards for buying and securitizing mortgages. The results were grossly overleveraged capital markets and inflated housing prices. The mortgage boom, which had reached its natural limits for at least a year, went bust during the latter half 2008. The entire financial industry now was on the verge of collapse. With strong encouragement from the Treasury Department and the Federal Reserve, the Federal Housing Finance Agency (FHFA) that September seized Fannie Mae and Freddie Mac, placing each under its conservatorship. And the Federal Deposit Insurance Corporation closed about 400 banks. Yet these actions merely have delayed the day of reckoning. Foreclosures in the last four years have been at levels not seen since the Great Depression.
President Barack Obama, like his predecessor, George W. Bush, lacks an understanding as to why the meltdown happened. That’s another way of saying that another one is likely to happen. Obama has been unwilling to challenge the reigning dogma that owning a home, which includes staying put in the face of a foreclosure, is an inherent right. Early on, he and top White House aides developed and put into place the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP) to prevent foreclosures. He also convinced Congress, twice, to extend and expand a highly generous (and now-expired) first-time homebuyer tax credit enacted late in the Bush era. And early this February he unveiled an ambitious proposal to subsidize homeowners saddled with negative equity, the proceeds of which would come from the pending $25 billion ‘robo-signing’ settlement that state attorneys generals and five major banks would finalize the following week; the banks already had admitted to processing foreclosure documents without due diligence. These measures don’t even include the combined $169 billion in federal funds to prop up Fannie Mae and Freddie Mac (as of last June 30), of which $28 billion has been paid back via dividends. Nor do they include ultimate bailout: $1.25 trillion in mortgage-backed securities purchased by the Federal Reserve during January 2009-March 2010 to keep long-term interest rates down.
Meanwhile, despite record-low interest rates, much of the nation’s owner-occupied housing inventory remains in distress. Foreclosure notices in 2011 totaled 2.7 million (allowing for multiple notices for a single property), notes the Irvine, Calif.-based RealtyTrac Inc. That’s actually down by a third from 2010, a fact owing mainly to the multi-state settlement talks then in progress. Of the foreclosure filings in 2011, notes RealtyTrac, slightly over 800,000 consisted of repossessions. The company projects this figure to rise 25 percent this year, now that the settlement is a done deal. The Jacksonville, Fla.-based Lender Processing Services (LPS) estimates 4.29 percent of all active residential mortgages in the U.S. by last October were in some stage of foreclosure, the highest figure on record. LPS also estimates that a loan in foreclosure last summer on average had been delinquent, without any payments made, for nearly 600 consecutive days.
One of the explanations for the huge backlog is sheer volume. All things held equal, for example, a bank processing 10,000 foreclosure documents faces a lot more delays than if processing 3,000 documents. But there is another reason: state law. Many states require mortgage lenders to go to court to complete a foreclosure. Those usually are the ones with the biggest backlogs. In states where going to court is optional, by contrast, the backlogs are small. Arizona, for one, belongs to the latter category. That’s a major reason why though its foreclosure rate was the nation’s second-highest for each of 2009, 2010 and 2011, its housing market is recovering nicely. Home prices in the Phoenix area in particular, though declining by about 55 percent during 2006-11, rose 2 percent during Fourth Quarter 2011, according to the Standard & Poor’s/Case-Shiller Index. That’s in contrast to a 2 percent drop in the quarter for the rest of the 20 U.S. metropolitan areas included in the Index.
The duration of foreclosure is by far the highest in states that require lenders to go through court and assume the burden of proof. The national average during Fourth Quarter 2011, notes RealtyTrac, was 348 days. Yet in Florida, which requires court action, the figure was 806 days. In New Jersey, another such state, it was 964 days. And in New York, which also requires judicial review, the duration was 1,019 days. For the record, in Maryland, home of the Ritters, the process took on average 634 days.
The states with the shortest average periods during Fourth Quarter 2011, by contrast, were: Texas (90 days); Delaware (106 days); Kentucky (108 days); Virginia (132 days); and Louisiana (134 days). These states, by no coincidence, have foreclosure laws that facilitate quick repossession and sale. In Texas, for example, lenders may choose between a judicial or non-judicial foreclosure. But even in a judicial foreclosure, the process is comparatively smooth. After a court declares a foreclosure, it usually auctions off the property to the highest bidder. In Kentucky, judicial review is mandatory, yet in practice the courts give borrowers a short time to repay mortgage debt before putting the property up for sale.
Maryland until recently had a fast-track system. But beginning in 2008, urged on by Democratic Governor Martin O’Malley, the legislature enacted laws designed to throw as many roadblocks as possible into the foreclosure process. While lenders still may go the non-judicial route, they must file an order to docket before proceedings begin and adhere to strict proceedings. And a law enacted in 2010 requires that creditors give borrowers an opportunity for mediation. The intent is to give homeowners temporary respite from creditors and protect them from mortgage rescue scam artists. But it may have had the unintended effect of encouraging distressed borrowers to make their stay permanent and free of charge. Keith and Janet Ritter surely qualify for this category.
It might not seem fair to make this couple into symbols of borrowers behaving badly; many homeowners across the nation have chosen to live cost-free and eviction-proof at others’ expense. Still, as exaggerations of a larger tendency, they deserve scrutiny. And courtesy of the Washington Post, they’ve received it. On the surface, the Ritters are the embodiment of success. For over five years, they’ve lived in a five-bedroom, 4,900-square-foot home along the Potomac River in Fort Washington, Maryland, an unincorporated, heavily black middle-class community in the southern portion of Prince George’s County, south of downtown Washington, D.C. The custom-built home, featuring French patio doors and Palladian windows, is well-furnished. If this is part of the middle-income housing market, it’s at the upper end. The husband and wife, respectively, ages 54 and 51, bought the property in late 2006, having become adept at buying homes and flipping them for a profit. Mr. Ritter learned the ins and outs of real estate investment with some money from his successful commercial building cleaning business. “I saw real estate as the way to wealth,” he says.
Surfaces can be very misleading. During the Nineties, Ritter bought properties in suburban Northern Virginia on the other side of the Potomac. He wound up receiving a lesson in law. According to federal prosecutors and court records, Ritter bought several properties and put them in the names of family and relatives. When he fell behind on his payments, he tried to stop foreclosure proceedings by filing for bankruptcy protection in their names. He later tried to dismiss the filings without informing the lenders. Whether aware or unaware this was illegal, he was arrested. He pleaded guilty to bankruptcy fraud in 2000, receiving a 15-month sentence at Petersburg, Va. federal prison.
By the time his probation ended in 2004, the real estate boom was in full swing. Rapidly rising property values presumably could protect even cash-short homeowners from going under. Keith Ritter and his wife weren’t about to be left out. They bought a 2,300-square-foot, $360,000 home in Fort Washington with a circular driveway and a pool. Shortly after, they borrowed against it to buy a half-dozen or more other properties. They grossed more than $200,000 from a pair of sales in 2004; two years later they made almost that much from a single sale. Times were sweet. The couple owned his and hers Mercedes sedans and took overseas vacations. But as 2006 wore on, the first signs of financial strain were showing. Ritter and his wife had a few attempted sales fall through when would-be buyers couldn’t get financing. But they remained confident enough to buy their current home on Riverview Road in Fort Washington for $1.29 million, thanks to a $1 million loan from the (now-defunct) Jackson, Miss.-based Realty Mortgage Corp. It was bad timing. Property values by now were falling and would continue to do so. During 2006-08, a Maryland state report indicated that housing prices in Prince George’s County fell 17 percent, while the number of properties in foreclosure rose more than tenfold from 3,094 to 32,338.
The Ritters still owned five properties. What they didn’t live in, they rented to others. But falling prices prevented them from obtaining refinancing. And a number of their mortgages were about to reset at higher interest rates. The couple’s first payment on their own residence – a hefty $7,600 – was due in January 2007. Keith Ritter recalled pondering: “Do we put the money we had left in this one? Or is it better to spread it to the others.” They chose the latter. It was a disastrous decision. One doesn’t have to be Donald Trump to know that when faced with a deluge of real estate payments, short-term retrenchment is imperative: Either sell off assets or allow creditors equity participation. The Ritters did neither. Soon enough, the couple received their first foreclosure notice. Realty Mortgage already had sold the loan, which in turn had been sold two more times. Lawyers representing the Reston, Va.-based Mortgage Electronic Registration Systems (MERS) brought forth a foreclosure suit.
But this was 2008, and the Ritters now had an ally in Maryland law. A sale of a foreclosed home couldn’t be completed during bankruptcy proceedings. Janet Ritter filed for bankruptcy protection. The case eventually was dismissed at her request, but her action kept creditors at bay for a while. The next year, with the couple’s rental properties (which included their previous residence) going into foreclosure, Keith Ritter filed for bankruptcy…twice. Each time, the case was dismissed, but he managed to disrupt the foreclosure process. In the spring of 2010, county authorities, their patience by now tested, sold their luxury residence on the courthouse steps. But a county circuit judge declared the sale invalid because a bankruptcy case was still active when the sale took place.
Later that year, the property went into foreclosure once again after the Orange County, Calif.-based Kondaur Capital purchased the note. The Ritters initially agreed to a short sale. But even with the listed price discounted to $1 million and then to $799,000, they could not find any takers. The couple said they offered to make payments, but that Kondaur had turned them down. Still, they had another ace in the hole: Maryland had just passed legislation requiring that lenders offer homeowners an opportunity to go through mediation. Mediation day came in April 2011, but the Ritters didn’t show up, claiming they never received the paperwork in the mail. Prince George’s County Circuit Court Judge Thomas P. Smith ordered the property sold anyway. The Ritters weren’t about to yield. Janet Ritter filed for bankruptcy, this time in Georgia, where she and her husband owned another home. The home was lost to foreclosure, but the action further delayed foreclosure on their Riverview Road home. Finally, in July, the house went up for sale at an auction. Kondaur bought it for a mere $552,500, less than half the 2006 purchase price. If it’s any consolation, the Ritters are in good company; the median sale price of a home in Prince George’s County has declined 52 percent since hitting its peak in 2006.
Keith and Janet Ritter weren’t done. Immediately, they went to court to challenge the sale. Judge Smith upheld it. But the couple had another legal ace up their sleeves: a tenant now was living with them. And recently-enacted federal and state laws prohibited tenants from being forcibly removed in the event of foreclosure action against their landlord. Kondaur Capital’s ownership of the property thus would have been rendered meaningless. Kondaur stood firm, insisting it was the true owner. The county scheduled a hearing in December.
The Ritters showed up this time. The tenant, who had just moved out, didn’t. The Ritters had to use a different line of defense. Fortunately for them, they had one: Kondaur Capital had no right to foreclose, argued Mrs. Ritter, because the mortgage’s numerous transfers of ownership made it impossible to identify the note holder. The lending industry’s practice of ‘robo-signing’ foreclosure papers supposedly created this state of affairs. Unfortunately for her and her husband, Maryland courts repeatedly have ruled that if a lender can provide records of a mortgage note’s history and how it came to possess it, the lender has the right to foreclose. For good measure, Kondaur’s attorney held up an original copy of the note with Keith Ritter’s signature in blue ink. Judge Smith awarded the home to Kondaur, which two days later filed for eviction of the Ritters. Even now, the couple insists on staying put. The husband is trying to persuade an investor to buy the house from Kondaur and sell it back. The Washington Post story ends with Keith Ritter cleaning out his residence. The intensely religious Ritter still calls his home “God’s house” because “that’s the only way we could have been approved for a loan.” By such logic, God wants him and his wife to remain. Earthly authorities, at least, now believe otherwise.
This is, of course, but one case. And it’s an extreme one at that. But in a macabre way, it’s a microcosm for what has gone wrong with the mortgage industry. Here we have a married couple who obtained a jumbo mortgage for which they were unqualified by any traditional standard of risk assessment and then lived in the home for a half-decade without making a single payment. “Anytime anyone tries to take your home, you are going to use the legal system to save it,” rationalizes Keith Ritter. In a way, one can’t blame him. The instinct to fight is always greatest when the stakes are highest. But by the same token, federal and state laws should discourage borrowers like him from taking advantage of the system. At present, they don’t. That’s why this case got as far as it did. Thomas Lawler, a former senior vice president at Fannie Mae, knows something has gone awry. “How is it people can stay in a house for five years without ever making a mortgage payment?,” he asks. “That’s a screwed-up process. It’s an example of how the process is broken.”