Avoiding the Auction Block

No other state has experienced the dizzying heights of the housing boom or the depths of the subsequent bust quite like California. Today, four metro areas in the Golden State have the highest foreclosure rates in the country, eclipsing -- for the first time -- even Las Vegas, Nevada. In last night's look at the housing crisis that continues to cripple this country, we traveled to southern California and met Lise Johnson, a mother of four who's been in the same home for 12 years and is desperate to stay put.

And then we did something that's hard to do... we followed Johnson's loan on its journey from a subprime (and now defunct) lender in California to Wall Street, where major investment banks bundled Johnson's loan, and thousands like it, into a security called the Rali Series. The Rali Series was an investment offering that included $9 billion worth of home loans, primarily from California, Arizona and Florida. Goldman Sachs, UBS and Citigroup peddled the Rali series to institutional investors, including pension fund managers, who were looking for a supposedly safe place to put their money.

According to attorney Joel Laitman of law firm Cohen, Milstein who is representing some of these investors, the investments were rated AAA and AA, meaning the likelihood of default was virtually nil. But in 2008, Lise Johnson and thousands of other homeowners faced exploding interest rates and stopped paying. That had devastating repercussions for Laitman's clients, who saw jaw-dropping losses when they opened their pension statements.

"The narrative thread that connects Lise and homeowners like her to my clients who are conservative pension fund investors representing working people like carpenters and boilermakers...is that these groups have been left holding the bag as the big losers in this mortgage-backed security scheme" Laitman told us. Meanwhile, Laitman says, the investment banks and rating agencies made a killing. "They made their money the minute the offering was done," Laitman says.

In our investigation into both ends of the housing bust, we found that today, homeowners who took out these loans, and investors, who bought them, often want the same thing... to modify the loans and avoid the auction block, where fire-sale prices mean investors recoup little. But getting a loan modification isn't easy. The government program Home Affordable Modification Program, or HAMP, pays servicers financial incentives, a few thousand dollars for every loan a servicer modifies.

But those 'financial carrots' aren't always enough. Back in Corona, California, Lise Johnson spent three years trying to get her loan modified. She says her mortgage servicer, Aurora Bank of Littleton, CO sent her down a rabbit hole of endless phone calls, lost paperwork and unanswered questions. Johnson's lawyer told us that for servicers like Aurora, foreclosure can be a lucrative profit center because they make money off of late fees and defaults.

Johnson's home was recently foreclosed. She received an eviction notice on October 13th, which she is trying to fight.

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