Legislation designed to stem foreclosures by allowing bankruptcy judges to erase some mortgage debt will be introduced by Congressional Democrats on Tuesday, and hopes are high that it will pass after a similar plan failed last year. See Full Story Here.
Since the servicers, banks and investors thus far have failed to do anything logical in this housing mess, the idea of letting bankruptcy judges apply some logic and have the power to rework mortgages for homeowners who are stuck is a great idea.
Servicers are filing foreclosures as fast as they possibly can and cramming them through the various states at a sickening pace. Our civil court judges and clerks of the courts are participating in this massive scheme as well going as far as being publicly proud of their “rocket dockets” where 300-400 foreclosure cases are jammed through a 2-3 hour period. Shameful.
Shameful because 95%+ of all of these cases are filed fradulently. Shameful because judges are allowing institutions to take people’s homes without so much as raising an watchful eye to ensure that there is an ounce of integrity or truthfulness in the allegations lodged by the Plaintiff’s complaint.
So, here’s what happens… a servicer takes a home in foreclosure. The family is forcefully removed and forced to move into a different home (probably owned by another bank or even the same servicer). The institution sells the foreclosed home for about 80-90% of current value (although the FDIC predicts it’s about 70% of current value).
So let me give you a real live scenario of how illogical what they’re doing truly is: The family that was just removed owed $210,000 on the loan at a 7% interest rate. The home’s current value is $125,000. The bank will sell it for $105,000. The family could afford a mortgage of $150,000 at 5.5% interest rate. After closing costs, attorneys fees, etc. the bank/servicer will net about $95,000 on that home.
Do you see my point here? If you take into account the interest that the family would pay on the modified loan over the course of the next 5, 10 or 30 years. The modified loan is worth 2-3 times the $150,000. But no, the bank would rather create documents and paper trails to foreclose on the home, kick a family out of their home and take a massive loss on the sale of the foreclosure. All this when they could have logically modified the loan and turned a profit on the loan through a bona fide modification of the family’s loan.
This madness occurs thousands of times a day in our country and it’s high time that the government use some of the billions of taxpayer dollars to protect the taxpayer instead of greedy, corrupt institutions that have been the major cause of this housing meltdown.
If we are to get the courts involved, then, it should be in an indirect fashion. Monitory for example. The problem with the courts is that there will obviously be fees involving trustees, filing and the likes which may seem diminutive compared to the fluctuating payments on an ARM loan in the long run but by forcing lenders to lower principal balances may do more harm than good. Keep in mind that lenders didn’t raise principals or interest of the loans when the market was healthy and home values were booming and most states have a rite of recision clause that provides borrowers a certain amount of time to change their minds about PROMISING to pay a certain amount each month for mortgage depending on interest, principal and so forth that are explained in the loan documents along with the actions that the lender WILL take if the borrower DEFAULTS. I know that no one could predict the future and negative things happen in life that may hinder ones abilities to sustain obligations but allowing the courts to change contractual ties would in my eyes affect lending/borrowing negatively. Not to say that lending/borrowing practices shouldn’t be regulated but this would only complicate matters at a time that we need clarity. In addition, most lenders have repayment programs including modifications that have been available to borrowers long before this mortgage mess arose ,as a matter of fact, FHA loans (Fannie Mae Fredde Mac) have guidelines that the lender must follow when a borrower becomes delinquent. I would also assume that involving bankruptcy would affect the borrowers credit in a way that if we do see a sudden turn-around of the housing market borrowers would be considered high risk because of the BK on their reflected on their credit reports. There is no cookie cutter solution to this mess. Besides how fair is it to those who have kept their Promise to pay. Different treatments for different ailments is what it comes down to.
I agree that we MUST do something I am just saying that direct intervention by government and justice systems may not be the answer. I believe that it is in the best interest of the lender to allow the homeowner to stay in the home. That is why, as I mentioned earlier, mortgage companies do have repayment plans available for borrowers. With job losses at record highs what difference does it make who decides what should be paid if there is no income to pay it. Also, lenders aren’t just kicking people out of their houses because they miss a payment. Foreclosure processes vary from state to state with the quickest process being 2 months (ie. TX) up to 2 years (ie. NY). Also, chapter 13 bankruptcy may be used to prolong the process. With that being said, if a borrower cannot rectify their situation within those time frames then they are probably better off seeking other residence. As far as local and state agencies picking up the tab thats what they were created for. With respect to a falling economy that will affect the amount of help that state and local agencies will be able to provide we must be systematic in our approach and rather than scrapping everything and starting from scratch we need to assess the whole situation and figure out what has worked and why and how we can integrate new schemes into the process. Casualties, unfortunately, are inevitable no matter what happens.
Thanks for your comment on the Mortgage Banruptcy Bill post. Right now, any solution to the economy is going to come down to doing it not because we want to or that it’s fair for everyone (ie. those who have continued paying their mortgage) but because we MUST do something to stop foreclosures. As long as this downward cycle/spiral continues, everyone will be negatively affected. Foreclosures are at the root of everything that is happening in our economy and if we dont’ stop them we will see this recession deepen tremendously and it will prolong greatly any recovery. It’s hard to find an expert that disagrees with this opinion.
I also think there’s a stigma in the court of public opinion that those who aren’t or haven’t paid their mortgage are “deadbeats” or lazy folks who just won’t work or won’t go find a new job. While that may be true of a few of, it’s a very minor percentage. We are seeing middle, upper middle and even the wealthy now affected by this storm. These are people that have always paid their bills but are now unable. We lost 2.6 million jobs in 2008. Unemployment may reach 10% in 2009. These numbers reveal that it’s not about those that are still paying their mortgages. God bless them and I hope they’re thankful that they haven’t been affected by the downturn like millions of people who have.
Removing a family from their home weakens the tax base, weakens the family unit, results in the need for more budgetary cuts at local and state levels which results in a loss of jobs and reduction in salaries, etc. etc. This doesn’t happen when we’re at normal foreclosure rates but when you have 1000′s of filings in any given month in one county and tens of thousands in a state in one month, we’re in for real trouble. This is now a normal monthly occurrence in many states and the problem will continue to spread until we figure out how to stop it – together as a country.
I appreciate and respect our dialogue on this issue. Please continue to engage and participate!