Loan Modifications – it’s not that complicated
I am constantly befuddled at the banks’ refusal to provide loan modifications to clients and even more frustrated at the inability or unwillingness of anyone (be it those in the judiciary or the legislature) to do anything about it. The entire process is totally out of whack. To illustrate, the banks have somehow convinced everyone, even the Florida Supreme Court (as part of the new mediation program) that homeowners must turn over a series of financial documents before being considered for a loan modification. Respectfully, that’s just not so. Production of tax returns, check stubs, or other financial documents are absolutely not necessary to obtain a loan modification. Under HAMP, ok, I will give you that. But for a private modification, they are absolutely unnecessary. If you disagree, take a look at my recent conversation with a bank’s attorney, which went something like this.
Mark Stopa: I have a client whose monthly payment was $2,500. We want a loan modification where we pay $2,000/month at 4% interest and the principal balance is reduced by $50,000 (to better reflect the current value of the house).
Attorney: We need financial disclosures.
Mark Stopa: No, you don’t. The parties can agree to this modification and my client will begin paying immediately. If my client defaults on the modified loan, we will consent to the foreclosure in the pending case.
Attorney: But then we would have lost the ability to claim that $50,000.
Mark Stopa: No, you wouldn’t. We’d consent that if we default on the modified loan that the bank reserves all remedies available for the breach of the original mortgage.
Attorney: We can’t do that. The bank would have to pay a new filing fee.
Mark Stopa: No, it wouldn’t. We can stipulate to the dismissal of the pending foreclosure lawsuit but have the court reserve jurisdiction to enforce the settlement. If my client defaults on the modified mortgage, you can obtain a foreclosure judgment in the pending case, ex parte, without paying a new filing fee.
Attorney: (silence)
Mark Stopa: Doesn’t this give everyone the best of both worlds? My client gets the loan modification it wants. The lawsuit ends. The bank resumes collecting monthly payments (which is supposedly what it wants). If my client defaults on the modified loan, the bank loses nothing. In fact, if my client defaults on the modified loan, it will be easier for the bank to foreclose than it would have been without the modified loan, because we are waiving all defenses.
Attorney: That sounds reasonable to me. I’m going to have to talk to my colleagues about this and get back to you.
Mark Stopa: (Still waiting for a return call)
Obviously this approach can’t work in every case (i.e. only homeowners who were confident that they could make the monthly payments indefinitely should enter a settlement like this). But why can’t hundreds, if not thousands, of foreclosure lawsuits be settled in this manner? Banks reduce the principal to the present value of the house, hence reducing the monthly payments to an amount the homeowner can afford. The parties stipulate to dismiss the pending case but reserve jurisdiction to enforce the settlement. If the homeowner defaults on the modified loan, the bank forecloses on the original mortgage (after, say, a 10-day notice), ex parte.
LOAN MODIFICATIONS SHOULD BE HAPPENING EVERY DAY in this manner. The lack of such modifications is clear evidence that banks would rather foreclose than work with homeowners. Let me say that again:
THE ABSENCE OF LOAN MODIFICATIONS IS CLEAR EVIDENCE THAT BANKS WOULD RATHER FORECLOSE THAN WORK WITH HOMEOWNERS. I sincerely hope, in the near future, that the legislature, the judiciary, and the public at large begin to catch on to what the banks are doing and stop letting them get away with it.
UPDATE: On July 8, 2010, I had a hearing in Tampa on a Motion to Dismiss before Judge Levens against Barbara Couture with Shapiro & Fishman. As the hearing progressed, we somehow began discussing the very issue set forth in this blog. In response to my argument that banks should be settling foreclosure cases via private modifications, Ms. Couture argued just what I’ve believed all along – banks don’t want to enter loan modifications where they reduce the principal (as I suggested above) out of fear that other homeowners will go into default. It’s not that these modifications wouldn’t make sense in that particular case – they would. But banks don’t care – they are so concerned with other loans, they won’t work with the homeowner who is right in front of them. In other words, banks want people who owe more than their house is worth to continue paying (accepting all of the blame for the mistakes made by Wall Street even though the banks were bailed out and homeowners weren’t), and if homeowners stop paying, the banks won’t enter a modification and will push for foreclosure.
Anyone else think this entire process is horribly unfair?
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