In the summer of 2001, with her marriage just over and her job gone, Vila Pace-Knapp was in dire financial straits. She was behind on her mortgage and had received the first of three letters indicating that her Bellevue home would soon be foreclosed on and sold at a trustee sale. One day, an associate broker from Windermere Real Estate named Dick Pelascini knocked on Pace-Knapp’s door.
She told him she wasn’t interested in selling. But he left her his card and told her he had a friend in the mortgage banking business; perhaps the two of them could work together to help her out. Soon after, Thomas Boboth, president of Pacific Shoreline Mortgage, visited Pace-Knapp. He, too, left a business card and indicated he could help her “save her home.”
She told both men about her difficult personal circumstances, but also said she did not need help. She intended to file for bankruptcy in order to stave off the foreclosure. But the bankruptcy court, for a variety of reasons, declined to grant her petition—three times.
Meanwhile, Pelascini and Boboth continued to contact her, “essentially harassing her until she relented and accepted their offer to ‘help,'” according to a judge’s finding in a lawsuit that grew out of the case. On Oct. 25, 2002, the evening before her home was scheduled to be put up for auction, Pace-Knapp went to Pelascini’s office and signed an agreement that she later testified she’d barely read. King County Superior Court Judge Suzanne M. Barnett later called Pace-Knapp “an unsophisticated homeowner whose ability to reason clearly during this period was obviously impaired.”
The agreement she signed was a sale and leaseback arrangement, with an option to repurchase. Boboth and Pelascini bought her house for $164,000, just $15,000 more than what she owed. (Its fair market value, according to Judge Barnett’s finding, was “at least” $226,100.) In return, the new owners agreed to rent the place to Pace-Knapp and give her the option of buying it back in two years according to a predetermined formula.
But the monthly rent charged was the same amount as her unaffordable mortgage payments. After the first year, she paid even more. When she tried to renew her lease again, the investors evicted her. “She ultimately lost the home to the speculators who set her up,” said Judge Barnett.
A bill signed by Gov. Christine Gregoire on Monday will likely prohibit these kinds of deals. Requested by Attorney General Rob McKenna, HB 2791 is designed to quell “foreclosure rescue” schemes—for which demand is currently very high. In King County, foreclosures are up 65 percent from a year ago, according to Chris Matty, chief marketing officer for foreclosurepoint.com, a listings Web site.
The law establishes a five-day opt-out period if the homeowner smells a scam; it requires that the homeowner be able to afford all the terms and receive 82 percent of the fair market value if the house is sold. Any “rescue” agreement also must be clearly printed in 12-point font and written in the same language that the consultant used to solicit services from the homeowner.
The legislation was not prompted by any one incident, says David Huey, head of the Consumer Protection Division in the attorney general’s office. “It’s simply our awareness of what was happening in the market.” The leaseback rescue deal, like the one that Pace-Knapp entered into, is the only one targeted under this legislation, Huey says, “because that’s the one where we’re seeing all of the abuse. I have yet to see it work in any situation.” The attorney general’s office doesn’t have numbers on how widely used the schemes are.
“People thought that they were being helped and in fact, without their own knowledge, were signing away the deed to their homes,” says Kristin Alexander, a spokesperson for McKenna.
Huey says the low success rate of the leaseback option deal is to be expected. The attorney general’s investigation found that, usually, rental payments are too high or the option-to-buy price is too high or it’s unrealistic to expect that the customer’s credit will improve during the course of the lease. The underlying problem, Huey says, is the purchaser’s philosophy: They’re trying to make money off someone’s foreclosure.
To this end, the new law establishes a “fiduciary” responsibility the moment a foreclosure “consultant” contacts a distressed homeowner—meaning they have to act in the homeowner’s best interest. The law’s definition of “consultant” is a page long and excludes only financial institutions, nonprofit counseling services, attorneys, or mortgage lenders.
“You gotta help or make money,” Huey says. “If you’re in it to make money, then you shouldn’t be telling people that you’re gonna help them because our experience is they don’t get help in this type of transaction.”
Jack Burns, a Kirkland-based real estate investor, hates HB 2791 and says it will only increase the foreclosure rate in Washington state.
Burns says he doesn’t use leaseback options anymore despite clients who have “begged” him to do so. Litigation has made the practice too risky; he says that in the past four years he’s only made three such deals—and been sued for two of them. One case is still pending, and the other was settled out of court.
The third homeowner agreed to speak to Seattle Weekly only if he could remain anonymous. “The opportunity that Jack gave us was there and he held true to everything he promised,” the man said. Yet the deal still didn’t work: He didn’t get his house back after the lease period. Burns did, however, give the man $4,000 to help him move and hired his wife to try to help them make ends meet, the man says.
Burns says a rescuer like himself can serve a valuable function. Consider this: An owner is trying to sell a home for $500,000 and owes $450,000. After all the closing costs, the owner would basically break even. The problem is, the house isn’t selling. Burns steps in and convinces the lender (usually a bank) to drop the mortgage to $360,000. Banks are open to discounts when they see foreclosures coming, Burns says. He finds an investor for the home, and the homeowner gets nothing. Considering that the asking price would probably have dropped anyway, leaving the deal with nothing is better for the homeowner than walking away with debt and a foreclosure on their record, he says. And don’t forget, Burns adds: A foreclosed home depresses the value of the entire neighborhood.
Huey recommends that a homeowner in distress instead consult a U.S. Department of Housing and Urban Development–approved counseling agency before things get too bad. “You can’t call two days before foreclosure,” he says. Solid Ground, Consumer Counseling Northwest, and the Urban League of Metropolitan Seattle are examples of agencies that could help a homeowner keep their home, Huey says.
Vila Pace-Knapp never got hers back.
For a while it looked as though she might. Judge Barnett found that Pace-Knapp had been a victim of fraud and that the contract she signed was therefore “voidable.” But the defendants appealed, and two weeks ago the Washington Court of Appeals overturned that part of Barnett’s decision.
Judge Ronald E. Cox wrote in his opinion that Pelascini and Boboth “deceived Pace-Knapp when they promised her that they would help her ‘save’ her home.” In reality, said Cox, “they saved her home for themselves so that they would not have to bid at the [auction].”
But the appellate judges also determined that while the defendants had violated the Consumer Protection Act, they had not committed fraud. They also said Pace-Knapp had waived her right to have the house restored to her by living there for more than two years and signing lease agreements even after she’d discovered what had happened. The case is now headed back to trial to determine monetary damages.
Bernard Lanz, attorney for both Pelascini and Boboth, says the pair may appeal to the state Supreme Court. All claims against Windermere were dismissed early in the case, as the judges determined that Pelascini was acting on his own.