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Wraparound Mortgages Turns Sour for FL Homeowners

Mortgage mess: Financier's bankruptcy leaves residents in lurch

June 21, 2016

By NICKI GORNY Ocala Star-Banner - Tribune News Service

As first-time homeowners, Angela and Luis Funez feel like they did everything right.

They chose a three-bedroom ranch in Silver Springs Shores, Florida, that was financially within their means. They more than maintained it, sinking somewhere around $10,000 into improvements like tile floors and remodeled bathrooms over a six-year period. And they paid their monthly mortgage religiously.

"We always paid on time," Angela Funez said. "Always."

So they never expected to find themselves where they are today: waiting for word on whether a foreclosure will force them out of the house they call they've been calling home since 2010.

Theirs is one of more than 100 homes in Marion County on which banks have foreclosed -- or are threatening to foreclosure -- following a declaration of bankruptcy by Francis and Jo Billy Frick.

The Fricks had been managing properties and financing buyers under F&C Developers, F&J Developers and F&F Quality Home Builders since 1999, according to court documents. By February 2015, when they filed for bankruptcy, they indicated in filings that they had interests in 131 rental properties throughout Ocala.

What the Fricks were not disclosing to renters and renters-cum-buyers like the Funezes, who have held the title to their home since 2012, was that they themselves continued to hold mortgages against the properties.

That meant that when the the court converted their bankruptcy filing to Chapter 7, meaning the Fricks would have to liquidate their assets, tenants and homeowners found themselves scrambling.

"It was many sleepless nights," said Ana Sweet, who had been renting through the Fricks, while pursuing an option to buy, when news of the bankruptcy and impending foreclosures hit.

She and her husband bought their home at auction last summer. They estimate they lost $13,000 when their option to buy through the Fricks fell through.

"That figure has stuck in my head very well," Ana Sweet said.

Casandra Barkley, who had been renting through the Fricks without putting money toward purchasing the home outright, likewise said she'd been shaken.

"I was almost homeless," said Barkley, who remains in her home with a new landlord. "I didn't have anywhere to go."

The financing scheme at play at the Funezes' home and 33 others is known as a wraparound mortgage. In this case, it means that an existing mortgage persisted while another was taken against the homes.

Raymond Andrews, president of Prime Mortgage Group, said that because a typical mortgage includes a due-on-sale clause, indicating that the mortgage must be satisfied when the holder of the mortgage sells the property, wraparound mortgages are not common. (Prime Mortgage Group, which is based in Ocala, is not involved in the Frick mortgages.)

The Funezes case stands as a clear example of how this played out. Court records indicate that the Fricks picked up the property by warranty deed in 2009 and used it as collateral for financing through Central Florida State Bank. (CenterState Bank of Florida later picked up Central Florida's mortgage.)

The Funez family arrived in 2010. They rented for two years while pursuing an option to buy, and took ownership of the home through a warranty deed in 2012.

The couple financed through the Fricks, so they paid their mortgage to the Fricks' office each month. They tried to refinance in 2014, they said, hoping that their improved credit would qualify them for a lower interest rate through a traditional mortgage lender. But the Fricks refused, a decision the Funezes said they didn't understand -- until bankruptcy proceedings revealed the other mortgages against their home.

Wraparound mortgages are legally legitimate, according to two attorneys representing homeowners who purchased through the Fricks, and would have been revealed in a title search on the property. But that's not an obvious step for the type of homeowners that the Fricks were attracting: often first-time buyers and buyers without the favorable credit scores that would have qualified them for traditional mortgages.

In his objection to the entry of the Fricks' bankruptcy discharge, which is still pending even as many of the homes involved are now locked tight or under new owners, U.S. Trustee Guy Gebhardt alleges that the couple deliberately took advantage of their clients. The motion alleges that the couple lured "unknowing and generally unsophisticated" tenants and buyers into leases with options to buy.

Knowing that their tenants' and buyers' credit put them at a disadvantage, Gerbhardt alleges, the Fricks marked up their properties above market value.

They also included charges for real estate taxes and property insurance in monthly rents, according to the motion. These sums were not placed in escrow accounts; around 100 of the properties showed at least one year of unpaid taxes.

The Fricks did not respond to multiple requests for comment.

The U.S. trustee's assessment is in line with what the Sweets said they experienced. The couple had moved into their home in 2010, after moving to Central Florida in search of better weather and a lower cost of living than they'd had in Massachusetts. Ana Sweet primarily supports the family as a medical assistant, she said, so financing through the Fricks seemed like a financially feasible path toward home ownership.

"It gave us that extra chance to come up with the down payment to be able to purchase the house," she said. It wasn't until later that they realized that chance had put them on track to pay significantly more than the market value of their home.

The Sweets moved in with a $3,500 down payment. They agreed to pay an extra $100, on top of their $750 monthly rent, toward their option to buy. Ana Sweet figures they were within $1,000 of taking ownership of the home when they received a letter explaining the bankruptcy.

"My heart fell to the floor," she said.

Across the neighborhood, Tony and Betty Dechaves knew they were in trouble when a sign appeared in their yard. They, too, had been renting while pursuing an option to buy. They figure they lost some $5,000 when the Fricks lost the home in bankruptcy, between a $3,000 down payment and around $2,000 in money paid toward their option to buy.

Unlike the Sweets, to whom they're related by an ex-marriage, they weren't able to arrange the loan they would have needed to buy the home outright at auction.

"We were ready to go," Tony Dechaves said. He'd gone so far as to pull up the plants he'd recently put in the front yard.

They later learned that the new owner, who had purchased the home at auction, would to let them stay as renters. They said they're reluctant to try an option to buy again.

For Barkley, the experience has made firm her resolve to purchase a home herself. Once she began to notice other Frick renters moving out of the neighborhood, she said she realized why the couple wasn't returning her calls requesting maintenance on her stove. She packed up her own house, lining her living room end to end with boxes, waiting for word that it was time to clear out.

She didn't know where she would go when that happened. With three children and a grandson, she said, she didn't think nearby relatives could put her up if they wanted to.

"I want my own house," she said, vowing to never let herself or her children go through the nerve-wracking experience again.

At the Funez home, the family is hoping that their attorney, Stanley Plappert, can arrange for them to stay where they are. They've worked hard to build a good life for their children, they said, and don't want to have to watch their teenagers pack up their rooms.

"I believe in God," Angela Funez said. "He's my lawyer."

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