Sanctuary at Costa Grande investors claim bank manipulated housing market
Oct. 22, 2013 at 5:22 a.m.
Updated Oct. 23, 2013 at 5:23 a.m.
An 800-acre luxury community in Calhoun County is at the center of a dispute in federal court.
Dozens of people who purchased lots at the Sanctuary at Costa Grande are suing Wells Fargo, which merged with Wachovia bank during the financial crisis in 2008.
They claim that after the deal was struck, Wells Fargo would not fairly renegotiate mortgage loans first offered by Wachovia.
Wachovia, one of the development's largest lenders, offered interest-only notes with a balloon payment at the three- to five-year maturation, according to the plaintiffs' claim.
Wells Fargo's lead attorney, Robert T. Mowrey, of Dallas, could not be reached for comment.
"For forever, the way these types of loans have worked is at the end of it, the bank will refinance into another, similar loan or a more traditional, 15- to 30-year note," said plaintiffs' attorney John Flood, of Corpus Christi.
"Under very unusual circumstances and as part of a transaction by the IRS that basically changed accounting laws, Wells Fargo had the incentive to buy Wachovia because it was going to be allowed to credit losses on Wachovia's books against Wells Fargo's earnings," Flood said.
Under the new loan terms, people were told to put down $50,000 to $100,000 to receive a short-term loan with a 5 to 9 percent interest rate, according to the plaintiff's claim.
When Flood's clients, who he described as "not high risk borrowers," could not or would not put down that amount, their property went into foreclosure.
When "you find out your investment is worth a tenth of what you were told it was worth and they say, 'Yeah, but you need to keep making payments at the $300,000 level even if its worth $30,000,' you're throwing good money after bad at that point," Flood said.
Some of his clients' credit ratings suffered. One couple, who are doctors, cannot qualify for a government funded loan, he said.
"Our lawsuit alleges Wells Fargo manipulated the market by instructing appraisers to only use foreclosure sales as comparables. ... We don't believe that was proper," he said.
Wells Fargo essentially stunted the area's growth, he said.
"All you really need to do is look around. ... You'll see other developments are flourishing, and it doesn't make any sense because the infrastructure at this development is stellar; it's five star," he said of a large marina and clubhouse that are still maintained after investors write out $2,000 checks each year to the homeowners association.
Mowrey wrote in a motion requesting the case be dismissed that the plaintiffs' "bare bone allegations" should not prevail.
Six of the plaintiffs admit they had no dealings with Wells Fargo; they just defaulted on their loans and thought their property's value decreased, he wrote.
For the supposed tax manipulation scheme, the plaintiffs did not explain how Wells Fargo suppressed other bids at the various foreclosure sales.
"Indeed, if Wells Fargo was actually utilizing under-valued appraisals, plaintiffs were free to purchase the properties at foreclosure for their 'true value,'" Mowrey wrote.
He also wrote that when the plaintiffs claimed they are owed for damages related to mental anguish, they should stipulate how Wells Fargo's actions significantly disrupted their daily routine, not just make a "naked assertion."
Federal Judge Gregg Costa, who is presiding over the case, dismissed six of the 14 claims.
The eight claims that stand are related to debt collection practices, wrongful foreclosure and fraud.
Darryl Hammond, the general manager of DH Development, said the Sanctuary at Costa Grande, which opened in Port O'Connor in 2006, is recovering.
So far, 37 houses have been built on 767 lots. Three or four lots are in the house building approval process. More than than 550 lots have sold, he said.
Hammond believes the lawsuit has merit.
"Things are going a lot better. Obviously, we had the recession and it was further magnified and made worse by Wells Fargo's activities," Hammond said. "We aren't seeing any foreclosures right now, but that does not mean there won't be some in the future. ... I don't talk to the bank to find out about that information."
Wells Fargo is expected to file its answer to the plaintiffs' claims in mid-November. And next year, the judge may decide whether to make this a class-action lawsuit, Flood said.