A Foreclosure Fix That Won’t Cost Taxpayers a Dime

I know a lot of lawyers who are like me.  As corny as it sounds, we really like to help people.  We see ourselves as riding to the rescue, and it hurts us to have to say “I can’t help you.”  But that is exactly where I found myself yesterday.

I met with a retired woman facing foreclosure.  She has her Social Security income, and a pension, that provide her with a reasonable income.  She owes a total of about $1500 other than her home mortgages.  But those two mortgage payments, not including taxes and insurance, total more than 50% of her income.

The problem is that she just can’t afford her mortgage payment.  Chapter 13 is not a good option in her case, because under current law, Chapter 13 does not change the basic terms of the mortgage–the payment, the interest rate, including any adjustable rates, balloons, etc.–all stay the same.  And on a fixed income, she can’t make the regular payments, much less a payment to a Chapter 13 trustee to catch up the arrears.

So we talked about the Hope for Homeowners program, and federally funded housing counselors, and negotiating with the lenders.  She’s done all that, and gotten nowhere.  In fact, she mentioned to me that when she started talking to the housing counselor, she could get him on the phone; now his voice mail advises callers that it might take him several days to get back to them.  Think he may be a little overwhelmed?

This woman ought to be the ideal candidate for the kind of workout that Hope for Homeowners envisions.  She has steady income and could make a payment on a reasonable mortgage principal and a reasonable interest rate.  The property has no equity, so it is a losing proposition for the lenders to foreclose.

But other than one representative who advised her that the first mortgage lender would take a short sale, she’s had no luck getting answers.  They haven’t said no–they haven’t responded at all.  In fact, she has been given conflicting information about who actually holds the mortgage, which may explain a lot.

The problem with all the federal programs currently in place is that they are all carrot and no stick.  They provide incentive to work with homeowners, but there is no adverse consequence if the lenders don’t.  And if you can’t get to the person who has the authority to make a decision about what is in the best interest of the mortgage holder, the process grinds to a halt.  And if the servicer of the mortgage doesn’t know who owns the mortgage, well, trying to find a decision-maker is an exercise in futility.

So the servicers do what they always do–they demand payment in full of all arrears, and if that isn’t forthcoming, they foreclose.  And they do that despite the fact that the foreclosure isn’t good for anyone–not the homeowner, not the mortgage lender, and not the community.

What we need here is a stick-an adverse consequence if the servicers and lenders don’t act in their own best interests and in the interests of all of us in stopping the downward spiral of more foreclosures depressing real estate markets which causes more foreclosures which leads to bank failures which results in less availability of funds which further depresses the market, and so forth.

And wouldn’t it be nice to find a stick that didn’t cost the taxpayers any more money, and, by the way, didn’t end up lining the pockets of the geniuses that got us into this mess in the first place.  Here it is, and it is simple and straightforward.  Modify the bankruptcy code to allow bankruptcy judges in Chapter 13 cases to modify home mortgages.  That’s it.  It really is that simple.

Liz Pullian Weston does a great job of explaining how this proposal “could prevent hundreds of thousands of foreclosures — without cost to taxpayers,” and also explains why you should support that proposal even if your home is not threatened.   Read the whole thing, and then contact your Congresscritter.  Before foreclosures destroy your financial future, and mine.