Lorie Zapf (photo by David Rolland)
Publicly, Lorie Zapf is campaigning for San Diego City Council on a platform of fiscal responsibility. Privately, however, the Zapf family has defaulted on a loan that could result in the foreclosure of their home.
As of March 30, 2010, Lorie and Eric Zapf were six months behind in payments on a $230,000 line of credit, according to a Notice of Default (NOD) that Wells Fargo filed with the San Diego County Recorder's Office. It's the second loan the Zapfs have taken out using the house as collateral.
The notice says the house may be sold if they don't pay the $7,048.71 past due by the end of June. They will also need to make up all payments they have missed since the note was filed, in addition to any penalties.
The house is located at 4622 Lisann St. in Clairemont, which was the location of a campaign event as recently as May 1. The address has previously been listed for Zapf's tort-reform organization, Citizens Against Lawsuit Abuse, and was the address used by Eric Zapf to register several website domains, including CabronTequila.com.
Through campaign manager Matt Donnelan, the Zapfs issued the following statement:
“Lorie's husband, Eric, is a realtor and in the process of negotiating an interest rate reduction for the second loan on their property from an adjustable to a lower 30-year fixed rate. Until negotiations are completed and a new interest rate in place, the bank holds rights to file, and often does file, what is called a notice of default with the county recorder's office. Within 90 days from the date of filing a borrower has the right to bring the note current, which will be done in this case. The notice of default is then removed and a notice filed with the county recorder's office.”
When asked about why the Zapfs are behind on payments, Donnelan said that CityBeat's “assumption” was “incorrect,” adding that “real-estate transactions and negotiations, the subject and terms being negotiated as well as final agreements between parties, are confidential.”
The Zapf campaign did not respond to further inquiries.
CityBeat ran the documents and the Zapfs' response past four different real-estate experts—a San Diego State University professor, a mortgage-fraud expert witness, a real-estate law firm and a Realtor and blogger who runs a property-information service. Some questioned the veracity of Zapf's claim, but all agreed it was a risky financial move.
Curt Novy, a former senior underwriter with Wells Fargo who currently investigates mortgage fraud in San Diego, says the Zapfs' explanation “doesn't hold water” and that the NOD would only have been filed if the Zapfs were unable or unwilling to make their interest-only payments.
“I can definitely state [that] the filing of an NOD is not consistent, normal or a standard procedure in changing loan terms from an adjustable to a fixed rate,” he says.
Pat Flannery, a real-estate expert who also runs the pot-stirring political site BlogofSanDiego.com, agrees with Novy. He calls the Zapfs' explanation “ridiculous” and “B.S.,” considering that they have defaulted on a specific loan called a Home Equity Line of Credit.
“First of all, any competent Realtor knows that a 30-year fixed-rate loan normally has a higher interest rate than a HELOC, not a lower rate,” Flannery says. “Any suggestion that borrowers withholding monthly payments, causing lenders to file Notices of Default, is normal practice in loan modification, is simply not true. A NOD means what it says: A borrower has failed to make their monthly payments. There are no mitigating circumstances.”
SDSU real-estate lecturer Mark Goldman says it's possible that the Zapfs are engaged in what's called a “strategic default.” This is when a borrower intentionally defaults on a loan in order to expedite mortgage modifications.
“In order to just have the bank consider your request, they pretty much force you into going into default,” Goldman says. “There's a lot of people in that situation.”
Glenn Etherington, a real-estate broker and paralegal for real-estate attorney John McConnin, agrees that this is a common trend among borrowers.
“It would certainly be nice if we didn't have to do that as homeowners,” Etherington says. “However, if homeowners dealing with the banks are current in their payments, then lenders seem to be fairly deaf when it comes to a homeowner's request for assistance…. It's very hard to convince lenders [when] a loan is current that you are in as much financial distress as someone who hasn't made mortgage payment for five or six months.”
The problem is that, in the meantime, the debt builds up: Including missed payments and penalties, Goldman estimates the Zapfs could owe $9,000 to $10,000 on the property.
Not paying your bills is a little like playing chicken with the banks; if you can't renegotiate your loan within 90 days of an NOD, your house could be sold. In addition, an NOD is an enormous black mark on one's record.
“You have to weigh the risk,” Etherington says. “There's severe credit consequences…. [Missing] one, two or three mortgage payments is devastating to your credit score.”
If it is a strategic default, Novy adds that the Zapfs could be in trouble if it turns out that they do have enough money to pay their bills.
“Keep in mind that lenders require the borrower to submit recent bank statements with a modification request,” Novy says. “If they have sufficient funds in their bank account, the lender would most likely decline the request…. If the borrower admitted they were intentionally not making payments, the lender would decline their request for seeking assistance under false pretenses. Modifications of loan terms are for people who are experiencing severe financial circumstances, such as reduced income, loss of employment, etc.”
In other words, it's not what you usually associate with a candidate running for office.
“Her realtor husband seems to be embracing the worst aspects of the mortgage mess, while she is lying to a reporter and saying it is OK,” Flannery says. “It is not OK. The issue, therefore, is her credibility and honesty. If those are her standards, she should stay out of office.”
Zapf is about to receive a huge boost to her campaign as the San Diego County Republican Party has been cleared by a federal judge to donate tens of thousands of dollars to her campaign. Eric Zapf has been paid more than $2,000 for “office expenses” since Zapf announced her bid for council.
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