Bales Fought Losing War on Home Front as Mortgage Debt Mounted

Army Staff Sergeant Robert Bales took his first step toward financial ruin while on a second tour of duty in Iraq. The man now accused of killing at least 16 Afghan civilians agreed to repay more than $500,000 in mortgages on two properties he owned in Washington state.

It was 2006, when many Americans thought the rise in home prices would never end. Bales’s wife, Karilyn, was working as a project manager at Washington Mutual, whose later collapse would be the biggest U.S. bank failure in history. The Bales family found subprime lenders who financed their two homes on terms that included balloon payments and floating interest rates starting at 8 percent.

Six years later, the houses are worth $148,000 less than the initial loan amounts. The couple defaulted on one mortgage in 2009 and recently attempted to sell the second property for less than they owe on it. For Bales, 38, it was a double nightmare of being ensnared both in unpopular wars in Iraq and Afghanistan and a housing-market meltdown at home.

“It’s not an unfamiliar story, but it’s sad,” said Richard Eastern, a co-founder of Bellevue, Washington-based Washington Property Solutions, which negotiates short sales. “We’re going to send you off to war but we’re going to foreclose on your home.” He said many lenders offered loans they knew borrowers couldn’t repay. “And it’s not just soldiers, it’s everybody. We set them up.”

The scenario is especially common in an area of Washington (BEESWA) where almost half of property sales are either short sales or foreclosures, according to Washington Property Solutions.

Fraud Charges

Bales’s money problems went beyond mortgage debt, to the time when he worked in the financial-services industry, records show.

He owed an Ohio couple about $1.3 million in damages, plus interest, for defrauding them in 2000 when he served as their investment adviser, according to the Financial Industry Regulatory Authority, which oversees the industry.

An arbitrator found that Bales “engaged in fraud, breach of fiduciary duty, churning, unauthorized trading, and unsuitable investments,” according to a 2003 report on the FINRA web site. Bales, who grew up in Ohio, worked in the industry there from 1996 to 2000, according to FINRA records.

Bales never paid the money and the couple could never find him, one of the victims, Gary Liebschner told WCPO TV, the ABC affiliate in Cincinnati.

Emma Scanlan, an associate of John Henry Browne, who is defending Bales against the military’s current accusations, didn’t immediately respond to an e-mail seeking comment.

‘Heartbreaking Tragedy’

By the time the judgment was rendered, Bales had already joined the U.S. Army, having signed up less than two months after the Sept. 11 terrorist attacks. He served a total of three tours in Iraq and one in Afghanistan.

After the March 11 killings in southern Afghanistan, he was flown to a U.S. military prison in Fort Leavenworth, Kansas. The Army will probably file charges against him on March 22, Browne said in an interview yesterday.

Karilyn Bales said in a statement yesterday that what happened “was a terrible and heartbreaking tragedy.”

Browne has suggested the incident may be connected to a brain injury Bales suffered. The military has suggested Bales snapped under marital stress and the influence of alcohol, an account Browne disputes.

Whatever led to the killings, it’s clear from court records that the Bales family was facing mounting money troubles.

No Help

A federal law, the Servicemembers Civil Relief Act, provides some protection against debt collectors and foreclosure for military personnel. Those protections were no help to Bales, because they only apply to debt incurred before active service.

“The whole concept of the SCRA vaporizes when you’re on active duty,” said John S. Odom Jr., a retired Air Force judge advocate and partner in the Jones, Odom & Politz LLP law firm in Shreveport, Louisiana. “You are expected to know the debt you can and cannot service.”

In King County, where one of the Bales’ properties is located, home prices have dropped 20 percent since 2006, according to the Northwest Multiple Listing Service. In Pierce County, where the Bales family now lives, property values are down almost 30 percent.

County records show Robert and Karilyn Bales refinanced their properties several times as the housing market took off, but slid into a debt spiral they couldn’t escape as soon as home prices began to drop.

Falling Behind

Karilyn Bales -- then Karilyn Primeau -- bought her first house in Auburn, Washington, in 1999, taking out a traditional loan insured by the Federal Housing Administration. The agency promotes home ownership among low- and middle-income borrowers, often with modest down payments. County documents show she took out a loan for $99,308, almost the full amount of the $99,950 purchase price.

According to the documents, she fell behind on the payments by about $5,600 in 2003, but managed to avert a scheduled trustee’s sale.

She refinanced the property in 2004 for $99,400.

Whether Karilyn Bales’ position at Washington Mutual gave her any special access to lenders is unclear. The couple was paying relatively high adjustable interest rates as they continued to take out mortgages.

After they married in 2005, they refinanced the Auburn house again, this time for $166,000 and a floating interest rate of almost 8 percent.

Second Home

The Bales family rented out the first property and bought their second home at the end of 2005 with two different loans. The first was a mortgage with an adjustable interest rate of 6.75 percent that could go as high as 13.45 percent, according to county records. The second was a standalone loan for $56,000. County records don’t show the interest rate.

Prepayment on the first loan carried a penalty equal to six months of interest payments, the documents state.

Nonetheless, in 2006, as Bales was in Iraq, his wife used her power of attorney to refinance both houses, into new adjustable rate loans. They soon found they couldn’t support the debt.

In August 2009, the lender on the couple’s rental home sought to auction the property. The Bales family owed $15,644.19 on the house plus $1,333.46 in trustee’s fees, according to the auction notice.

The auction subsequently was canceled without explanation.

Rick Simon, a spokesman for Bank of America Corp., the servicer of the loan, didn’t respond to an e-mail seeking comment.

Today, the couple’s two houses have a combined assessed value of $358,100, 29 percent below the initial loan amounts, county records in Washington state show.

“The tale used to be: We would speak to a family and it seemed like a predatory lending environment,” Eastern said. “But it’s the American dream, right? Go buy a house and we’ll give you the opportunity to do so. And they did.”

To contact the reporters on this story: Clea Benson in Washington at cbenson20@bloomberg.net; Elliot Blair Smith in Washington at esmith29@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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