‘Lucky 7’ Get to Tear Up the Mortgage After 5 Years

The first inkling of great good fortune came with the delivery of envelopes bearing yellow stickers that marked them as registered mail. The message inside brought puzzled, furrowed brows, then a second reading, then joy.

“This changes my whole life,” said one of the recipients.

For tenants of seven condominiums in El Toro, the news was that after only five years of mortgage payments--not 30 years, mind you, or even 15, but five, a mere 60 months--they owned their homes, free and clear. They could tear up the mortgage documents, burn them, bury them, scatter them to the winds. They were home free.

The mortgage forgiveness was unique in Orange County and rare anywhere, according to Clare LaGuardia, the housing bond coordinator in the county administrative office.

The story begins in 1982, when the county sold $33 million in tax-free municipal bonds to investors, planning to use the money to go into the home mortgage business. The idea was to lend the money to home buyers just as a bank does.

Bond Buyback

The loans, available only to county residents who had never owned homes before and who had incomes of no more than $37,560 a year, were to be repaid with interest over a 30-year period.

While the $33 million was lying around waiting to be used, the county invested it elsewhere and earned hundreds of thousands of dollars, which went into a pool that eventually was to be used to pay off the bonds--in 25 years or so, everyone thought.

But before the county’s tenure as a mortgagee got a good start, interest rates fell so dramatically that it made no sense for homeowners to pay the county rate of 13.375% when they could get a loan from a private bank for less.

So the county kept about $31 million of the $33 million in investments, making a good return until 1985, when under federal law it had to either use the proceeds of the bond sale for the original purpose or buy back the bonds. At that point, the county bought back most of the bonds.

Mortgages Disappear

But what about the $1.9 million that had been used for the original purpose of the bond sale? That money had been lent to 33 home buyers--and much of it had been repaid bit by bit as many of the 33 sold their homes or refinanced to take advantage of falling interest rates.

By last summer, fewer than a dozen homeowners who had obtained mortgages under the county program still had those mortgages, and only $230,000 in bonds was outstanding.

By law, the county had to keep track of how much it made on the bond sale and the investments of proceeds from it--and when that amount grew to a sum large enough to buy back the remaining bonds, it had to do so.

It was at that point, a few months ago, that the seven homeowners who still had county mortgages under the program became the lucky seven. For when the bonds were repurchased, their mortgages simply disappeared.

“I never expected anything like this,” said 28-year-old computer programmer Peter Fokos. “Does anybody? I didn’t even know it could happen.”

The postal carrier brought his registered letter in September, and Fokos signed and read it.

“It’s pretty incredible,” he remembered thinking. “I couldn’t really understand what it was about.”

A phone call confirmed what LaGuardia said in her Sept. 15 letter.

“Please be advised that effective immediately you are no longer required to make payments of principal and interest on the . . . mortgage loan,” LaGuardia wrote.

Her boss, County Administrative Officer Larry Parrish, wrote a separate note to county supervisors, warning them that word might get around to other residents who bought homes under similar programs and they should be ready for calls. But the calls never came.

Parrish told the supervisors that the forgiveness applied only to loans from that single bond issue in 1982.

“When (my) staff first informed me” about the lucky seven, “I was incredulous,” Parris said. “These things just do not happen.”

He stressed that the county lost no money. Bond buyers who might have expected to receive interest for 20 or 30 years as a result of people paying off the mortgages wound up getting interest payments for only five years before the bonds were repurchased from them, but they had been warned of that possibility, county officials said.

For the seven, “it’s like the fantasy of buying the right lottery ticket,” Parrish said.

One of the seven condos involved belongs to Lorraine McBrearty, 42, single and suddenly unburdened of the biggest debt most people ever face.

McBrearty, who paid $58,000 for a one-bedroom condo and was required to make only a 5% down payment, thinks of her good fortune as the “luck of the Irish.”

“I’ve been working since I was 13,” McBrearty said. “I believed I’d have to struggle and struggle forever. But now it’s like I can take a second breath.”

McBrearty said her involvement in the bond issue was a “fluke” and that she nearly lost out on her bonanza the same way.

“I didn’t know anything about the bond issue until escrow,” she said outside the neat, one-bedroom condo that once cost her a $719-a-month mortgage payment. Now all she has to pay are the property taxes, about $700 a year, she estimated.

She said the escrow officer told her when she bought the condominium that there was an outside chance the bonds could be called in 20 years or so, which would mean an end to her payments.

“I yawned and said, ‘Sure,’ ” she remembered.

McBrearty said she had considered applying for a new loan at a lower interest rate from a bank, as some of her neighbors did, but failed to do so because “I procrastinate.”

That has turned out to be her luckiest trait. Had she refinanced, she would not have benefited from the county buyout.

A neighbor of McBrearty, Linda Cecena, said she was “ecstatic” about the news when she found out about her good fortune from another of the lucky seven.

And yet another of the county’s beneficiaries, who declined to be quoted by name, said simply, “we’re all happy” and “it’s a great thing.”

She, like the others interviewed, said they were reluctant to shout about their good fortune lest they be perceived as gloating.

“I’m trying not to make a big deal out of it,” Fokos said. “It’s a wonderful deal, but I’m just trying to keep it down.”