Kapaa, Kauai » A few seats down from where 8-year-old Manuia Gantt sat building a Lincoln Log home, her parents were holding a whispered discussion about saving their Kauai home from foreclosure.

The child painstakingly placed the roof on her structure, only to see pieces scatter across the table.

"Now you have to start over, Manuia," her dad said.

It’s a topic that Paul Gantt, a disabled Vietnam veteran, knows well, since he is trying to shore up his own living situation. Gantt and his wife Kena have until Feb. 16 to fight a notice of foreclosure from lender JP Morgan Chase or the home that they are building with their own hands goes to auction. Two of the couple’s daughters and a grandson live with them in their spartan home with its peekaboo ocean views.

The family said they took on too much when they refinanced their modest home loan for the third time, borrowing $1 million in Kena’s name to construct an income-producing day care and triplex on their 6.2-acre Apopo Road lot.

Their story is a microcosm of the housing crisis that saw Hawaii property values soar to artificially high rates and many borrowers get locked into unaffordable loan products.

The Gantts, who have been trying to save their home and business complex since 2008, point to unscrupulous and overzealous lenders for getting them into a mortgage they can’t afford. The lenders say the couple bears responsibility for their distress. If the Gantts lose their home, they will join the 12,425 Hawaii property owners who went through some stage of foreclosure last year.

"I was sold a dead dog," said Paul Gantt, who stopped making payments 26 months ago when a balloon clause in his loan pushed his $5,400 interest-only monthly mortgage payment even higher.

At the height of the island housing market when property values were soaring, the Gantts were told by an appraiser that their property would net $3.46 million if they built it out. The family, who had purchased their lot for $282,000 in 2003, said they were mesmerized by the possibilities. They became convinced that rental and business income would subsidize their difficult loan payments and help them secure the family’s financial future.

"We were told we were sitting on gold," Kena said. "Brokers told us we just needed to develop it and we would be set."

The fact that the Gantts’ annual $40,000 income was not sufficient did not stop them. The Gantts said they went to Legacy Mortgage, who used the value of the property, Kena’s high credit score and a business plan to get them into a jumbo loan in 2007. A loan officer showed the couple how to use an old business license to inflate their stated income by more than $8,000 a month, he said.

"We didn’t question this because we don’t know about how loans work," Gantt said. "We thought this was what you do to get a loan."

No one at Legacy Mortgage told the couple to falsify documents, said Jo King, branch manager of Legacy in Kauai. They had to meet stringent bank criteria to get the loan, which was the only $1 million loan that Legacy Mortgage had ever brokered, King said.

"The banks just didn’t close their eyes and write a $1 million construction loan," King said. "(The loan) took a long time to do and they kept asking for more documentation."

The money was lent with the understanding that it would be used to complete the plan by the required deadline, she said. The Gantts acted irresponsibly, King said.

"He had a deadline to get the property complete, but he took his family on an extended trip," she said. "He was very generous with his money. I was shocked when he even brought back black pearls for everyone in this office."

If they had finished on time, the Gantts could have paid off their mortgage or significantly reduced their obligations by renting or selling a portion of their improved property, King said.

"What did he do with the money? If he would have followed his plan, he’d be on easy street," she said. "He didn’t finish any of it."

Though the couple said they were current on the loan for the first year, they said high loan fees and closing costs reduced their capital. Using the construction money to make high loan payments depleted funds, Gantt said. Financial records support that the couple used the construction loan as intended, but they needed more money to finish, he said.

"We didn’t use the money for anything but construction," Gantt said. "We didn’t pay for the pearls. They were gifts from my wife’s family in Tahiti."

The Gantts say in retrospect that they should not have qualified for the mortgage and that Legacy Mortgage got them in over their heads.

"It seemed like a good idea, but it became a nightmare," Gantt said. "We signed the documents and the broker got more than $20,000 in compensation."

Kauai Realtor Phil Fudge said the Gantts are a perfect example of what put the housing market in crisis.

"It all stemmed from the loans that were being made for people that couldn’t afford them," Fudge said, adding that the Gantts might have been all right if they had attempted their plan on a smaller scale.

Gantt put his trust in the mortgage industry and it was misplaced, Fudge said.

"Paul is like a lot of people. If an authority figure sits in front of him and tells him that this can happen, he believes it," he said.

The Gantts began seeking hardship waivers and loan modifications from their lender Washington Mutual (WaMu) in 2008; however, by that time, the global financial crisis had made financing more difficult and their property value had dropped to about $900,000.

In 2009, WaMu offered the couple a modification agreement.

"We signed it and then didn’t hear anything for a month," Gantt said. "When I called, they said it had been lost."

The family had to start over again after JP Morgan Chase & Co. acquired the company, he said.

Loan modification forms have come from Chase representatives in South Carolina, Texas, Florida and Colorado, Gantt said.

"They keep asking us to send in documents that we’ve already sent," he said. "Then, they deny us because they don’t have the paperwork."

Chase did not respond to questions regarding Gantt. However, Chase spokesman Tom Kelly said the lender’s "priority is to help people stay in their homes whenever possible."

Since the beginning of 2009, Chase has offered 1 million mortgage modifications to its borrowers and has prevented 439,000 foreclosures through modifications, short sales, and other programs such as deed in lieu of foreclosure and forbearances, Kelly said.

While Kelly makes the process sound easy, Gantt compares it to his days as a radio operator during the Tet Offensive in Vietnam.

"It’s like constantly being in a foxhole," he said.

Gantt has sought assistance from U.S. Rep. Mazie Hirono and U.S. Sens. Daniel Akaka and Daniel Inouye. He has written letters asking for a case review to everyone from Jamie Dimon, Chase’s chairman and chief executive officer, to Federal Reserve Chairman Ben Bernanke; Neil Barofsky, the U.S. attorney appointed as special inspector general of the U.S. Treasury’s Troubled Asset Relief Program; and Treasury Secretary Timothy Geithner. Gantt also complained to the Office of the Comptroller of the Currency, the agency that supervises national banks, that Chase and its affiliates used "inappropriate loan practices and deception."

Hirono wrote Dimon on Tuesday asking him to review Gantt’s complaint and advise her on what recourse would be available to her constituent.

On Wednesday, Gantt hired James Fosbinder, a Maui attorney who began specializing in foreclosure litigation after officials in 50 states and the District of Columbia began jointly investigating complaints that mortgage companies may have mishandled documents and broken foreclosure laws.

Gantt said he hopes that Fosbinder can get his foreclosure eliminated or postponed long enough for him to work out a solution with the lender.

On Thursday, Gantt said a Chase employee in South Carolina called to say that the company was sending another batch of modification documents.

"Here we go again. Different person, same stuff," he said.

Gantt hangs up the phone and continues to worry. Foreclosure could be only a month away.