Fighting an Outbreak of Mortgages Too Good to Be True

By JIM DWYER

Published: September 8, 2007

Last week, the lawyers at a legal clinic in Brooklyn set the answering machine to stop taking new messages. So many people in Brooklyn and Queens are in trouble with mortgage bills that the lawyers cannot keep up.

“That’s the first time we’ve had to suspend taking on new clients,” said Meghan Faux, co-director of the Foreclosure Prevention Project at South Brooklyn Legal Services. “There’s no way we could answer all those calls and provide proper representation to our clients.”

Through this week, notices of pending legal action against homeowners are up by 48 percent in Queens and by 40 percent in Brooklyn over last year, according to the county clerks. Foreclosures in the city have doubled since 2005.

The subprime crisis that has knocked the financial markets began, at least in New York, as fliers taped to lampposts in Brooklyn and Queens over the last decade. These posters promised good deals on loans or home refinancing. Lending to low-income people at high rates became a thriving business.

Last year, Tilton Jack, a retired transit worker, opened the mailbox at his home on Cortelyou Road in Flatbush, Brooklyn, and found a leaflet advertising low-interest loans. He was soon visited by Michael Goltche of Golden First Mortgage, according to court papers, who told him that he qualified for a 1 percent mortgage.

Too good to be true?

In fact, the rate was 1 percent — but for one day. On the second day, it increased to 8.13 percent. Now, it is 8.77 percent. But those jumps are not what is sending his mortgage into a financial death spiral.

Under the terms, Mr. Jack’s monthly payment is set as if the mortgage cost just 1 percent, even though it is much more. So the seemingly low rate is a trap: every month, the unpaid interest is being piled onto his principal. When it reaches 110 percent of the original loan, the payments will be adjusted to the full 8.77 percent — on the principal that has been swollen by the unpaid interest.

“The principal has been increasing ever since he got the loan, and his payments will go from $1,100 a month to over $3,000,” said Navid Vazire, a lawyer with the Foreclosure Prevention Project who is representing Mr. Jack.

Mr. Jack, 82, had fallen into the grip of a maddeningly dense mortgage scheme known as “payment option adjustable rate mortgage.”

“Nearly all our clients with these loans are elderly, on fixed income, so they have no prospect of making the dramatically higher payments,” Mr. Vazire said.

Feeling uneasy about the loan after the closing, Mr. Jack tried to exercise his right to cancel it within three days, according to court papers, but could not reach Mr. Goltche. A person who answered the phone yesterday at Golden First Mortgage, which is based in Melville, on Long Island, said Mr. Goltche no longer worked there and referred inquiries to a lawyer who did not respond to a message.

In early June, Nerida Cuccia of Queens Village said she got phone calls from people who claimed they could give her a mortgage at 2.25 percent for five years, and then 20 years at 5.5 percent.

Ms. Cuccia, who will be 61 tomorrow and retired in March as a nurse practitioner from the city hospital systems, said she was deeply skeptical.

“But even if your gut tells you something’s wrong, the percentages make you forget about the gut,” she said. The loan was issued by Countrywide Financial, the lender that had come close to collapse. The closing took place at her home on 215th Place. She did not have a lawyer examine the papers.

“They told me, don’t worry about it,” she said. “I’ve refinanced before with just a notary.” She said the papers she signed showed the promised rates, but when her first statement arrived, she found that the loan was for 8.25 percent. And like Mr. Jack’s loan, her payments were set at a rate that meant she would lose ground every month. She is now being represented by the Foreclosure Prevention Project, which is considering a lawsuit.

The phone number of the brokers in Monroe, N.Y., who set up the Cuccia loan has been disconnected.

“It mortified me, for sure,” Ms. Cuccia said. “I will handle this. It makes me sick to think of some little old lady getting stuck with this.”

And the answering machine at the legal clinic will be turned back on next week, Ms. Faux said.

E-mail: dwyer@nytimes.com