Housing crunch 

Lawyer unveils a plot twist in the story of city manager's California foreclosure

As City Manager Penelope Culbreth-Graft grapples with the biggest financial crisis to hit Colorado Springs in decades, she faces a financial quagmire of her own, brought on by the impending foreclosure of her $1.25 million California beachfront property. She's also delinquent on that home's property taxes and is being sued over its second mortgage.

But according to her attorney, Culbreth-Graft had worked out a deal that would have paid the second mortgage lender in full — only to find that the lender, Huntington Beach City Employees Credit Union, refused to accept it. That refusal, combined with the knowledge that someone in California tipped off Colorado Springs news media about the lawsuit, have led Todd Friedland to believe that a credit union board member is trying to ruin his client.

"There is a person on the board of the credit union that has a grudge against Penny Graft," Friedland says. "They had a prior relationship within city government where they didn't get along. So we think that person might be driving this process. We're going to prove the Grafts were not treated fairly."

He won't name the employee, and the credit union won't release a list of board members.

Different kind of victim

Friedland's contention of a credit union leak is supported by Culbreth-Graft's observation that media knew of the foreclosure action before she did.

In the only interview Culbreth-Graft has given on her financial situation, she said by phone last week, "My husband and I have basically lost everything for coming here. If we'd known the global economy was going to collapse, we would have done a lot of things differently, no question about it.

"I don't like being cagey and nontransparent, and I wish I could scream from the top of the hills why this is going on, but I can't do that yet."

Culbreth-Graft's financial woes can't be overstated. They could damage her credit rating, destroy her chances of buying another property, cost her higher insurance charges, hinder a future job search, and drive her federal income taxes through the roof, a financial adviser says.

And yet none of that has anything to do with her work as city manager, some say. Chantell Taylor, a lawyer with Colorado Ethics Watch, calls Culbreth-Graft's problems "strictly personal." Likewise, Darryl Glenn and other Councilors don't see Culbreth-Graft's predicament as pertinent to her city duties, which include oversight of a $345 million budget.

"I still have 100 percent confidence in her to lead the city," Glenn says, adding, "She's going through situations other people have gone through."

But hold on. Culbreth-Graft doesn't fit the stereotypical mold of mortgage-meltdown "victim," generally an inexperienced buyer who took on variable-rate loans that reset automatically, inflating payments and leading to default, or getting in a bind after being laid off and not being able to make payments.

Culbreth-Graft didn't face variable rate pressure, records show, and she's hardly unemployed. Now paid $210,000 a year as city manager, she made more in a similar job at Huntington Beach.

She and her husband, William, were frequent fliers in the San Diego County real estate market, buying and selling three homes from 1996 to 2003. She says they moved three times, because she changed jobs three times during those years.

"We moved because cities require you to live in their cities," she says, noting they made money "every single time" they sold their home.

Except later, with the Huntington Beach house.

Before the crash

Their problems began in September 2004, when the couple bought the beachfront property four months after Culbreth-Graft was named Huntington Beach's city administrator. They paid $1,259,000 for the gated-community home, which has a "trickling fountain and slate drive," a "soothing spa" and a master bedroom balcony with ocean views, according to a property listing. The couple took out two loans on the 2,456-square-foot house: a 30-year loan for $990,000 at 5.875 percent interest, which could reset and cap in 10 years at 10.875 percent, and a $143,100 revolving line of credit. Both came from Countrywide Home Loans Inc., one of the lenders at the center of the mortgage crisis.

About a year later, the couple refinanced, taking out a 40-year loan with San Diego County Credit Union for $1,141,000 and paying off the original two loans. The new loan carried a 5.25 percent interest rate for five years and then could reset. They refinanced, she says, because, "We had a crummy loan, and the loan rates were going down."

In July 2006, the couple got another loan, borrowing $250,000 from the Huntington Beach City Employees Credit Union. "We had a lot of upgrades we had to do to the house," she says, declining to be specific because of the pending lawsuit.

In November 2007, Culbreth-Graft was hired in Colorado Springs. Before selling their California property, she and her husband bought a newly built four-bedroom, four-bath home at 382 Irvington Court in Broadmoor Spires, paying $875,000.

Her Springs contract allowed her to collect up to $9,000 for six months rent, but Culbreth-Graft says the couple chose not to rent in order to save the city a little money. Also, she thought the California home would sell.

"When we moved here," she says, "the economy [in Southern California] was doing really well and thriving, and we leased with the intent that that party was purchasing the home at the end of that lease."

Problem was, by the end of the contract, the renter lost his job because his company shut down, and he couldn't make good on the deal.

Changing conditions

One expert contends the California real estate market clearly was in deep trouble long before the couple moved. Ivar Rydstrom, a California attorney and accountant who's worked for New York banks and submitted testimony about the mortgage crisis to the House Ways and Means Committee, told the Indy in an e-mail that in Orange County, where Culbreth-Graft's house is located, foreclosures rose 241 percent for the period ending June 30, 2007, over the previous year.

Culbreth-Graft counters that the market hadn't crashed in her neighborhood: "The house immediately across the street sold for $1.7 million" not long before they left California.

By April 2009, things were looking bleak. She and her husband failed to pay $7,070 in property taxes on the Huntington Beach house and by August owed $8,133 with interest charges. (Orange County doesn't sell properties for delinquent taxes for five years.) On Aug. 21, San Diego County Credit Union began foreclosure proceedings, noting the couple was behind $36,659 in payments on the $1,141,000 loan. Under California law, the home could be sold as early as December.

A week before those proceedings started, Huntington Beach City Employees Credit Union filed suit to recover the $250,000 loan, noting Culbreth-Graft and her husband "have refused to pay [their] obligations." The lawsuit seeks sale of the house and recovery of whatever part of the $250,000 isn't covered by a sale.

The Grafts claim in their Sept. 22 answer to the lawsuit that they don't owe the money, because the credit union breached the "covenant and duty of good faith and fair dealing."

Friedland, the Grafts' attorney, says the couple offered both lenders a deal that most banks would have accepted amid the mortgage crisis, chipping in $100,000 of their own money to make sure the city employees credit union wasn't shorted any cash.

"There are a lot of short sales going on," Friedland says, "a lot of workouts being done. Even [President] Obama says the banks need to work with people.

"The Grafts had a short sale pending for a very long time, and the holder on the first [mortgage] was on board, and the credit union was nonresponsive and would never get back to them. Ultimately, [credit union officials] were not willing to go forward on a sale that would have made them whole. We can't figure out why they would do this, other than there's something going on. Maybe it's a grudge. Maybe it's mismanagement at the credit union."

Friedland said a recent TV news report in Colorado Springs about the credit union's lawsuit featured account documents he believes are private and were leaked, similar to when media outlets were tipped to the foreclosure action.

"Someone's feeding them, and why would they do that?" he says. "Who would act in such a manner, and why would the credit union pursue this action, as opposed to working through the sale process or trying to work something out?"

The credit union's attorney, Larry Rothman, says he plans to disprove the Grafts' defense.

Possible consequences

Meanwhile, mortgage loan defaults and foreclosures impose "a terrible black mark" on credit ratings, local financial planner Craig Carnick says, which in turn has other effects.

"The credit report and court record become an important part of getting a job, a loan, getting insurance and security clearances," Carnick says. "How can you expect them to manage at work if they can't manage their own finances? Even buying a car, you'll get a higher [interest] rate if your credit rating is low."

(The city provides Culbreth-Graft with a 2005 Ford Escape for which taxpayers paid $27,437.)

At present, the Grafts' loans on the California home total $1,391,000. The house is listed at $1,199,000, and it's also posted for rent at $2,850 a month, even as prices are falling in Huntington Beach.

Culbreth-Graft says she's frustrated that she can't tell the whole story because of the pending lawsuit.

"They're not the circumstances the average homeowner would have to deal with," she says. "They're extraordinary."


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