Kris Boschele and John Heinemann decided to enter the mortgage business in 2002, creating a company called Universal Mortgage Funding.
Between late 2002 and early 2005, Universal arranged more than 300 loans, mostly for customers of Performance Realty and later Realty Place. The vast majority were insured by the Federal Housing Administration, which encourages lending to lower-income families by promising to repay lenders if borrowers don't.
Heinemann describes Universal as "a lender of last resort," serving customers who couldn't get loans elsewhere. "It made sense for us to try to get them a home even if we didn't make any money on the loan," he said.
How did Universal qualify people for loans where other lenders failed?
An Observer review of federal data shows the company relied on a kind of loan that was never intended for broad use by lower-income families. Buydown loans increase the amount that customers can borrow by reducing the monthly payment for the first two years of the loan.
FHA rules restricted the use of buydowns to borrowers whose incomes are likely to increase by the third year. Nationwide, buydowns accounted for less than 5 percent of FHA loans. But Universal arranged buydowns on about 85 percent of its FHA loans, federal records show.
The company also helped customers avoid an FHA requirement that they make a 3 percent down payment. On about 90 percent of Universal's FHA loans, home builders provided the borrower with the required money, federal records show.
Heinemann and Boschele had tried to work with other mortgage companies. For a time, Performance Realty partnered with Fidelity & Trust Mortgage, a Maryland mortgage company that had offices in Charlotte.
Jeff Kennedy, who now runs his own mortgage business, worked for a few months in early 2002 as the Fidelity & Trust employee assigned to deal with customers from Performance Realty. Then he asked for a different assignment.
"It was a waste of my time," he said. "You'd look at 10 deals and eight of them couldn't even get a Bi-Lo card. They certainly couldn't afford a house."
Heinemann said Performance Realty soon cut ties with Fidelity & Trust because it wasn't offering competitive interest rates.
The Observer has reported over the past two years on the government's failure to ensure that companies followed the rules of the FHA program. FHA loans account for almost a quarter of recent foreclosures in Mecklenburg County.
The FHA has now barred both of the practices central to the success of Universal, eliminating buydowns in 2005 and prohibiting down-payment gifts earlier this year. Borrowers who received loans with either feature were more likely to foreclose.
Heinemann says Universal was shuttered because of the "headache to dollar ratio." But he acknowledged that the company also was close to losing its permission to arrange FHA loans because so many of its borrowers were defaulting.
About 15 percent of the customers who received FHA loans through Universal have lost their homes to foreclosure as of last month, compared with 10 percent of all customers who purchased homes through Realty Place.
Online map allows you to scan Mecklenburg developments for foreclosures. Also, read our full series on foreclosures in the Charlotte area. www.charlotte.com
/foreclosure
