By MATT CHANDLER and KELSEY SWANEKAMP
Buffalo Law Journal

Don't call Tom Liolos a predatory lender.

Though he is in the lending business, Liolos, the branch manager at Homestead Financial in Amherst, is quick to distance himself from the class of lenders whose actions are criticized in the foreclosure report released July 9 by the Western New York Law Center.

"I wouldn't put somebody in a house they couldn't afford," Liolos said, referring to a practice that many believe led to the nationwide mortgage-lending crisis.

Kathleen Lynch, who spearheaded the Law Center study, says there are plenty of lenders who lined up to offer loans with outrageous interest, complicated terms, and virtually guaranteed foreclosures in their future to prospective home buyers.

"There were absolutely cases where individuals were targeted who weren't in a position to understand these contracts and terms," Lynch said.

The report, "Foreclosing Erie County," reviewed more than 5,000 mortgages that went into foreclosure in 2007 and 2008 in an attempt to break down who was being foreclosed upon, as well as what areas of the county were hardest hit and what banks were most frequently at the other end of the foreclosure notice. Lynch says it is the largest such study of its kind in Erie County, and one she hopes will help prevent future mortgage crises.

"We felt like we had to do the study to find out what was going on," she said.

What her team found, as they analyzed the data they collected, was that one in three subprime, or high-risk, mortgages in tonier areas such as Amherst went into foreclosure during the two years studied, and many of the foreclosed properties came from mortgages originated in the last three years.

The report points the finger largely at mortgage lenders and financial institutions that, Lynch said, preyed on borrowers and were charging interest rates in some cases higher than 20 percent.

"These lenders had no responsibility for the loans they were originating," Lynch says. "They didn't care about the risk because once the deal was done, they passed that risk along to someone else (by selling the loan)."

Liolos, whose firm brokered $31.9 million worth of loans in 2007 at an average of $85,000 per deal, said that's not how his company does business.

"We are involved with the loans from start to finish," he said. "After closing, we sell the loans to a servicing company, such as Bank of America. They pay us for originating the loan, (but) we're on the hook. If the first payment defaults, we have to buy the mortgage back." He said even after the deal is done, if the mortgage gets to be 30 days late, Homestead is liable for the mortgage.

"We have more at stake than people who just sell off the mortgage, so we're less likely to make iffy loans," he said.

Lynch and her staff don't dispute that there are honest, responsible lenders out there, but she says the study exposed case after case of lenders using misleading, deceptive tactics and complicated contracts to trip up unsuspecting borrowers. Among the tactics she says her group saw:

• Adjustable rates that increased monthly.

• Loans that began with a set interest rate, then at a preset time opened up to a limitless interest rate.

• Loans with fixed interest rates in excess of 20 percent.

• Loans that exceeded the value of the property.

• Elderly homeowners pushed to refinance their homes at high interest rates for long-term mortgages.

• Loan agreements that were suddenly changed at the closing, putting the buyer into a much riskier loan product.

"We're not out to malign someone who isn't engaging in bad practices," Lynch said, adding that she hopes the data collected will be used by municipalities and law-enforcement agencies, among others, to ensure that prospective home buyers all have a fair chance to not only obtain a home loan, but to be able to repay it.

But for smaller lending institutions such as Cattaraugus County Bank, headquartered in Little Valley, not engaging in these "bad practices" hasn't saved them from poor public perception as the fallout from the housing crisis has worsened. Salvatore Marranca, president and CEO of CCB, says he is "mad as heck" at the actions of some of his colleagues in the banking industry.

"We're paying for the sins of others," he said. "A few big megabanks screw up, and we pay. They do ill or imprudent things, I pay, and they're not held accountable. It's very frustrating and very unfair."

Marranca says in the last year, his FDIC insurance has increased 400 percent, and he blames the lending mess.

"If I made those business decisions (risky loans to unqualified borrowers), this bank would be closed down in a second," he said.

Though 2,710 lis pendens transactions (the first step in the foreclosure process) were filed in Erie County in 2007, the study revealed that only 35.9 percent of those properties ended up being foreclosed on. Despite that relatively low number, Lynch said there is still cause for concern going forward, despite government regulations put in place in the last 12 months to protect homeowners facing foreclosure.

"This is an issue that affects renters as well," she said. "Everyone is impacted, and we are hopeful that this report can be helpful to prevent these types of harmful trends from happening in the future."

To view the complete study report, visit www.wnylc.net.

WNY foreclosure facts

• Key findings from the Western New York Law Center's "Foreclosing Erie County" report released last week - figures here are based on 2007 data.

• Total unique lis pendens (preforeclosure) filings in Erie county: 2,710

• Top 5 municipalities for preforeclosure, based on total lis pendens actions filed
Buffalo, 1,110
Cheektowaga, 271
Town of Tonawanda, 208
Amherst, 196
Hamburg, 163

• Highest concentration of lis pendens filings by ZIP code: 14215, with 309

• Top five originators of loans for which lis pendens proceedings were begun
HSBC Mortgage Corp., 136
M&T Mortgage Corp., 101
First Priority Mortgage Inc., 72
Option Mortgage Corp., 63
Devere Capital Corp., 58

Credit crunch: Enough blame to go around

The Western New York Law Center's recently released "Foreclosing Erie County" report comes down pretty hard on mortgage lenders, certainly those that engaged in predatory practices.

The Buffalo Law Journal asked Law Center attorney Kathleen Lynch to flesh out those criticisms and address how borrowers too played a role in loan defaults.

BLJ: According to your study, 35.9 percent of the homes were foreclosed on. In an area the size of Erie County, that number - roughly 973 residential properties in 2007 - seems fairly low. Is this really a crisis?

Lynch: It's a complicated picture and you can't make an easy assumption, but there is a significant problem. If you walk around to some of the communities around here, you'll see a very different story. A lot of those houses don't have the value that equals the loan.

In the end, lenders end up with this loan where the property isn't worth it and the cost of the foreclosure process isn't worth it and the bank doesn't want the property. I mean, do they really want to end up with 800 properties in the City of Buffalo right now? Who are they going to sell them to?

BLJ: You talk about the need for people to look out for the consumers in these transactions. What about the consumers looking out for themselves and being responsible borrowers?

Lynch: Yes, we absolutely believe borrowers have to be responsible, and we ask that question all the time as we review these loans. And the reality is, (borrowers) should know (what terms they're agreeing to), but they don't. There is a need to have a very clear document available to borrowers so that they know exactly what they are getting into.

This is difficult work. It is a process that isn't friendly to the consumers, and is not designed for people to really understand what they are getting into.

BLJ: If people really don't understand what their interest rates and terms are, shouldn't they just walk away, or hire a lawyer to guide them through it before signing a document locking them in on a 20 percent interest rate on their home?

Lynch: Those are the ones where you see a signature right below a 20 percent fixed rate, and you say, "What's going on here?"

BLJ: Taking the emotions off the table, shouldn't a consumer who failed to meet the terms of a repayment agreement be foreclosed on? Why should the lender foot the bill for borrowers unable to make their payments?

Lynch: Absolutely, there are people who should not be homeowners. There is no question about that. They just aren't ready to buy homes. The housing counselors will sit down with people, review their incomes and figure out what they can afford, and there are times they have to say to people, "You shouldn't buy a house yet, you're not ready."

On the other hand, you don't see a lot of mortgage brokers doing that. The industry is set up to make the deal. On top of that, there are people who are clearly targeted for these loans - people who clearly did not have the ability to understand what they were getting into.