04 Mar A Common Sense Mortgage Solution From An Arkansas Attorney
My friend Kathy Cruz is one of the smartest bankruptcy and consumer law attorneys I know. If this country ever needed a female lawyer from Hot Springs Arkansas as its president, I recommend Kathy for the job. Kathy was telling me a story about a lawyer who was having a hard time trying to convince a Pennsylvania Judge that mortgage companies prefer to foreclose on property rather than rework a loan, because the Judge believed it would cost the mortgage company more money to foreclose than it would to make the loan affordable and productive. [In banking terms, a loan that receives timely payments is said to be productive.]
Federal Reserve Chairman Bernanke echoed similar comments when he suggested banks should write down the principal loan balance of default loans to encourage borrowers to continue making payments rather than walking away from the loan and the property. The Chairman, like the Judge, believes banks stand to lose more money tying up a loan in foreclosure and ultimately selling the land at a loss than they would had they simply rewrote the loan while someone still lived in the house and wanted to make affordable payments.
Kathy pointed out why banks donâ€™t deal in the same sense so common to the Judge and the Chairman. Because the loan is securitized and the investors who bought into bits and pieces of the money stream are not experienced nor set up to service the loan in a default situation. Let me translate. There is no money to be made in working out the problem. Kathy says the trusts that own the mortgages hired mortgage servicers to attend to the day to day collection of payments, and when those payments stop coming in on a regular basis, the loan transfers to a special form of mortgage servicer called a default servicer. Default servicers have the incentive to foreclose on the property, because that is how they get paid â€“ to close out the deal. They are not paid to rework the loan. These default servicers hire foreclosure mill attorneys who handle hundreds of cases and no one takes a particular interest in the borrower, the property or the economy. The days of the friendly local banker down the street holding the title to the homes in the neighborhood are long gone.
Common sense supports Kathyâ€™s conclusions. One need only look at the numerous proposals announced by the White House and Secretary Paulson to fix the mortgage mess, and the many fed fund overnight interest rate cuts, yet so far none have stemmed the tide of foreclosure and the economic downturn. We have identified the problem. Now it is time to use common sense and rewrite these loans. And since the banks will not listen to Chairman Bernanke and do it voluntarily, Congress should listen to the Chairman and pass a law letting Judges fix the problem.
Andy Miofsky, Esq.
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