When Guillermo Galindo lost his two-family Revere home to foreclosure in 2009, the soft-spoken Colombian thought he had finally freed himself from the flood of threatening collection letters from his lender and a ballooning, untenable debt.
All of his savings, scraped together over years delivering medicine for local pharmacies, were gone, along with the home he bought in 2005 for $410,000. Devastated, the 54-year-old immigrant, along with his wife and 3-year-old daughter, packed their belongings and moved into a small apartment, hoping to rebuild.
But that hope evaporated in a matter of months, when Galindo received a letter from a lawyer saying he owed $136,547 on the family home he’d left behind.
The lawyer represented a mortgage insurance company that Galindo had paid premiums to for years. He’d never given his insurance policy much thought — it was just something he needed to buy to qualify for a mortgage, since he couldn’t afford a big down payment. He thought it would help him if he got in a bind.
Too late, Galindo realized that the policy protected only the bank, and nothing prevented the insurer from coming after him for losses related to the foreclosure on his former home in Revere.
“I have to fight every day to find my food and not go to welfare, and then I have to pay $140,000?” Galindo asked. “What did I pay insurance for? It was a rip off.”
What Galindo considers a rip off is an insurance industry practice that has the potential to flatten tens of thousands of former homeowners just as they are getting back on their financial feet. The New England Center for Investigative Reporting has found that more than 200 Massachusetts residents and thousands more across the United States have been pursued by mortgage insurers for losses ranging from tens of thousands of dollars to more than $200,000 since the foreclosure crisis began about seven years ago.
Private mortgage insurance was created to help less wealthy people buy homes by reducing the risk to mortgage lenders if the borrower defaults. Generally, home buyers who make less than a 20 percent down payment must buy the insurance, which typically costs $30 to $70 for every $100,000 borrowed; the policy pays the bank for some of its losses if the borrower doesn’t pay the mortgage and the house goes into foreclosure.
But while the policies have helped hundreds of thousands obtain a mortgage nationwide, they also created a class of homeowners who were especially vulnerable when the economy crashed in 2008. They had large mortgages — sometimes pressed upon them by predatory lenders — and little equity in their houses. When real estate values collapsed, they often owed more than their houses were worth.
And when these buyers stopped making mortgage payments, lenders couldn’t get all of their money back even by selling the property; Galindo, for example, had a mortgage of $389,500 while the foreclosure auction brought in just $101,500. Insurance proceeds help cover these “mortgage deficiency” gaps; insurers, in turn, can go after the former owners to recover their payouts to lenders, sometimes from people who had already lost almost everything.
The recovery process often starts with letters and threatening phone calls and ends with lawsuits, wage garnishments, and even arrest warrants. Former homeowners who have been pursued include a New Hampshire grandmother forced into bankruptcy by the process; a Florida couple fighting the insurer’s claim, saying they weren’t adequately informed about the risks of mortgage insurance; and a displaced Maryland family now fearing that an insurance company will seize their car or a relative’s home.
“It is just knocking people when they are down, particularly when we live in a world where there were so many bad mortgages made,’’ said Ira Rheinold, executive director of the Washington, D.C.-based National Association of Consumer Advocates. “It is incredibly unfair.”
Legality vs. fairness
Most major mortgage insurance companies — including California-based PMI Mortgage Insurance Co., which sued Galindo — maintain they have the right to seek money from former homeowners to recover their losses from foreclosures. But consumer and housing advocates say it’s unjust to pursue victims of an epic housing collapse in which real estate nationally lost 30 percent of its value in four years, according to the Federal Reserve.
Most of these borrowers, they say, had no idea they could be dunned for more money after they lost their homes. Although borrowers sign a paper at closing acknowledging that mortgage insurance protects the lender, not the borrower, documents do not warn borrowers specifically that insurers could pursue them for losses.
Nationwide, the number of people at risk of being pursued for a mortgage deficiency by insurers or lenders runs into the hundreds of thousands. The companies that dominate the insurance business covered 977,000 loans in 2013 alone, representing about 12 percent of new home mortgages nationally, according to Inside Mortgage Finance.
Such debt collections, said Judith Fox, a Notre Dame Law School professor, add to what she calls the “foreclosure echo” — the damaging effects of the housing downturn on people who may just be recovering financially. “We’ve started to see it more and more,” Fox said.
An examination of hundreds of court documents in Massachusetts and interviews nationwide with scores of former homeowners, housing advocates, and attorneys found that consumers have scant control over whether their mortgage insurance company will seek repayment after a foreclosure.
■ Borrowers have little choice of insurance companies. Generally, they are required to use the lender’s choice, which is generally identified in closing documents but premium costs may be blended, unidentified, into mortgage payments after that. As a result, borrowers cannot shop for companies that don’t engage in post-foreclosure debt collection.
■ The risk of debt collection depends partly on geography. States such as Nevada and California severely restrict insurers from dunning homeowners after foreclosure, but other states allow insurers to pursue foreclosure debts decades later. In Massachusetts, insurers must begin debt recovery within two years of foreclosure, but court judgments against former owners are binding for 20 years.
■ Most companies say they only target a small number of “strategic defaulters” — homeowners who abandon a property even though they still had the resources to pay toward the mortgage. But the New England Center spoke to former homeowners across the country who say they fought to save their homes and were left with nothing, only to be blindsided by mortgage insurer claims.
In one case, the insurer dropped debt-collection efforts after the New England Center informed officials that the debtor was a single mother earning $30,000 a year and on the brink of filing for bankruptcy.
Mirian Pineda, an immigrant from El Salvador who speaks little English, admits she was naive when she purchased a three-family home in East Boston in 2003 for $550,000. But a real estate broker convinced her she could make a $4,500 monthly mortgage payment by combining rent from two of the units and her income working 75-hour weeks as a hospital custodian and moonlighting at a nearby factory.
By the time Pineda realized her mistake, she’d already sunk her $27,000 life savings into a down payment and struggled through several refinancings. In 2010, she let the house go into foreclosure and moved with her son and daughter into a three-room apartment. She couldn’t believe it when, in the fall of 2013, she received a letter from Mortgage Guaranty Insurance Corp. saying she owed more than $160,000 on the house — a number that ballooned to nearly $200,000 with interest and fees.
“When we learned her income situation was materially different for the worse compared to the time of her loan, we decided it no longer made sense to pursue collection,” Mortgage Guaranty spokeswoman Katie Monfre said in a written statement.
Former homeowner talks about effects of PMI company suing her for damages
Policies vary for insurers
Some insurance executives said privately that the practice is questionable because the controversy surrounding it damages the reputation of an industry touting its benefits to homeowners. But, on the record, most companies stress that they pursue only a small percentage of deficiencies, and some pursue none at all.
Officials from Genworth Mortgage Insurance Corp., based in North Carolina, for example, said they generally don’t go beyond letters and calls to former homeowners because more aggressive tactics have such a small rate of return.
Officials at the California-based Arch Mortgage Insurance Co. say they “currently” don’t pursue deficiencies at all.
On the other hand, PMI Mortgage Insurance Co., Mortgage Guaranty, and United Guaranty Residential in North Carolina each have filed dozens of court cases against former homeowners seeking financial damages for bank losses that the insurers covered.
Officials from Mortgage Guaranty said they seek damages in less than 1 percent of its claims nationwide — or about 2,000 cases since the housing market began to slow in 2005. Like other companies, they say they pursue only those people they believe still had the ability to pay when they walked away from their homes.
“We don’t look to kick widows and orphans out onto the street,’’ said Mortgage Guaranty official Michael Zimmerman.
United Guaranty officials declined to comment, but officials for PMI Mortgage, which sued Galindo, said the mortgage deficiency recovery process allows insurers to “step into the shoes” of the lender to recover losses caused by a foreclosure.
PMI stopped taking new customers in 2011 and was seized by the Arizona Department of Insurance, which has the company under receivership. Steve Clutter, a spokesman for the Arizona agency, said PMI exercises its right to seek claims in only 1 or 2 percent of its cases nationwide — about 400 borrowers since 2011.
“These are a very small number of borrowers who could pay, but made a strategic decision to default on their mortgages,” Clutter said.
PMI identifies these borrowers in “a very careful process,’’ he said, including looking at whether former homeowners remain current on other financial obligations.
Struggling to keep home
Consumer advocates argue that most people struggle desperately to save their homes — sometimes opting to stop paying an unmanageable mortgage while still paying smaller bills.
Galindo said he exemplifies that kind of borrower. He lost his home, but he said he avoided other debt because he didn’t use credit cards. He struggled for months to avoid foreclosure, but was unable to make his $2,400 monthly mortgage payment because his tenant stopped paying rent and his delivery job salary dropped from $45,000 a year to $38,000, following a cut in hours.
Galindo’s lender eventually offered him a $3,000 settlement to move out, which he did, and he had thought all of the issues related to the house were settled until the insurer’s lawyer demanded money.
“I don’t see why they picked on me,” Galindo said.
Clutter, in Arizona, said PMI officials would not comment on specific cases or individuals.
For some, the debts were so much larger than their annual salaries that they couldn’t fathom making payments.
Leslie and Edward Simpkins lost their Maryland home in 2010 after Edward, 47, was laid off from his $48,000-a-year union job as a painter. He now earns $15,000 a year working part time.
Leslie Simpkins, a 38-year-old homemaker, said she and her husband — who have three small children — were shocked to hear from Mortgage Guaranty that they owed $120,000 for losses on the home they purchased in 2007 for $245,000. They attempted to settle with the company but were unable to pay even $30,000, she said.
They moved in with Edward’s mother, and now worry Mortgage Guaranty will put a lien on her home because she had co-signed for the couple’s original mortgage.
“We owe the money. We just don’t have it,’’ she said. “Talk about lack of sleep, talk of lack of sanity.’’
Jeff Lane, Mortgage Guaranty’s general counsel, said the company believed the family still had assets, including some $50,000 in equity in the relative’s home. He said the company is still willing to negotiate a lower payout but the Simpkins, despite what the family said, have failed to communicate with it.
“We are fully justified in trying to recover some of what we have lost from those who are obligated to, and can, pay,” said Lane, who had the family’s permission to discuss their case.
Barbara Anthony, a former undersecretary of the Massachusetts Office of Consumer Affairs and Business Regulation, said insurers should be more up front with borrowers about the financial risks of mortgage insurance.
“People are confused about what PMI means,’’ she said.
Even a prolific collector for the insurance companies, Beverly-based lawyer Jeremy Cohen, recognizes that many borrowers are confused and angry at first because they have either forgotten entirely about their mortgage insurance policy or never understood the implications.
Cohen said he has filed more than 150 cases in Massachusetts courts since 2008, and in about two-thirds of cases obtained court orders for debts adding up to about $9 million.
“There is a lot of animosity up front, there is a lot of ‘You will never see a dime from me’ attitude,” said Cohen. But, he said, former homeowners “should pick up the phone” because his insurance company clients often settle for a significant reduction in the debt.
That kind of reduction happened for David Lazaroff and Meredith Levine more than a decade after they lost their property.
In 1989, the couple purchased a two-family home in Allston for $226,000, but lost it five years later after their tenant couldn’t pay the rent and Lazaroff’s $40,000 annual salary as an engineer wasn’t enough to cover the mortgage.
For years, a lawyer from Mortgage Guaranty stayed in touch with the couple to see whether they could settle a debt of about $66,000 to the insurance company.
The pair eventually agreed to pay $500 a month until a reduced $20,000 debt was paid off in 2011. However, to this day, they remain renters, regretting buying a house without having a large enough down payment to avoid the insurance entanglement.
Other troubled borrowers like Galindo can only dream of putting their debt behind them. PMI obtained a judgment in court for damages in 2011 that had already ballooned to nearly $169,000 by 2013 with court fees and interest.
The insurer is now trying to get money from the one-man CPR training company Galindo recently launched.
Galindo worries he’ll be in debt for the rest of his life: “It’s like a dark cloud over your head all the time.’’The New England Center for Investigative Reporting (www.necir.org) is an independent, nonprofit news outlet based at Boston University and at the studios of WGBH News (NPR/PBS) in Boston. NECIR interns Ryan Towey, Paula Sokolska and Andrea D’Eramo contributed to this report. Jenifer McKim can be reached at firstname.lastname@example.org.