Mike and Ellen Kahara knew times were tough. They'd run up about $30,000 in debt on their credit cards and had fallen about $8,000 behind on their mortgage payments.
But they didn't know how tough things had gotten until a stranger showed up at their Long Beach home last month to inform them that Wells Fargo had sold the house out from under them and that the new owner — a San Diego real estate investment firm — wanted them out as soon as possible.
"We were shocked," Ellen Kahara, 32, told me. "We'd been given no notice by the bank. Suddenly we were being told that we had no home."
Their shock was all the greater because they'd been told less than a week earlier that Wells Fargo had rejected their application for a loan modification. Within just a few days, the bank had turned around and sold the property — even though Wells had assured the couple in writing that it wouldn't do this.
"I have never seen it happen anywhere near this fast," said Laurence Clarke, a Los Angeles real estate attorney who has handled numerous foreclosure cases. "This is a particularly egregious situation."
The Kaharas are in the same boat as thousands of other homeowners who have fallen behind on mortgage payments. About 4.5% of U.S. homes were somewhere in the foreclosure process during the second quarter, according to the Mortgage Bankers Assn.
You could say the Kaharas have only themselves to blame. They entered into a complex, interest-only loan when they purchased their two-bedroom house for nearly $300,000 in 2004. Before long, their monthly payments had risen to almost $3,000.
But, like many others, they also got hammered by the lousy economy. Mike Kahara's small construction company foundered as business dried up. Ellen helped out by working as a nanny, but it wasn't enough to keep them afloat.
"It was really stressful," Mike Kahara, 34, recalled. "We kept asking our creditors what we could do to work things out. They just said we should make more money."
The couple received a notice of default on their mortgage from Wells Fargo in August 2009. But a bank rep said there might be some hope. The Kaharas were advised to seek assistance through the Home Affordable Modification Program, a federal program intended to help homeowners by modifying loan terms.
In December, they were notified by Wells that they were eligible for a three-month trial loan modification that would lower their monthly payments to about $1,400. The Kaharas managed to make all subsequent payments in full.
After the three months were up, Ellen Kahara said, they were told by Wells that their case was still under review and that they should keep making the $1,400 payments. They did.
The bank continued requesting paperwork as part of its review process. Ellen said she called Wells on Aug. 9 and for days afterward to check on the status of their loan modification but never got a call back.
The Kaharas received a letter from Wells dated Aug. 11 saying that their application for a permanent loan modification had been rejected. The letter said the Kaharas would have 30 days to discuss other options available to them.
"No foreclosure sale will be conducted and you will not lose your home during this 30-day period," the letter said.
But on Aug. 18 there was a knock at the door around 8 in the morning. Mike Kahara said a young man wearing a white polo shirt and dark slacks introduced himself as Sebastian Cruz of the investment firm Pacifica Cos.
Cruz said his firm had purchased the house and that he would offer the Kaharas $1,500 if they'd agree to vacate the property within two weeks.
He produced a document with Pacifica letterhead informing the Kaharas that their home "has changed ownership through the foreclosure process." It threatened legal action if the couple didn't move out.
"I thought it was a scam at first," Mike Kahara said. "Then I realized he was serious."
Reached by phone, Cruz said that Pacifica had bought the house at a real estate auction. He declined to answer any other questions. No one else at Pacifica returned repeated calls for comment.
Jennifer Langan, a Wells Fargo spokeswoman, confirmed that the Kaharas' house was sold Aug. 16, just five days after the bank decided not to modify the couple's loan.
She said the bank shouldn't have told the Kaharas that their home wouldn't be sold within 30 days. "It was clearly a mistake that we put that in the letter," Langan said.
"We regret any difficulties our miscommunication has caused the Kahara family," she said. "We have called the family to review their complex situation and will take another look at their financial circumstances.
"Unfortunately, despite our best efforts, we can't always find an option to prevent a foreclosure. The miscommunication was our mistake and we will work with the family to address the issues it created."