Archive for September 4th, 2012

Principal Reductions? Do You Feel Lucky, Punk?

Do you remember the National Mortgage Settlement?  You know, that settlement between the nation’s biggest banks, the federal government, and 49 State Attorneys General that made so many headlines from months ago?  Did anything ever come of that?  Did it provide any help to American homeowners?

As with every other government program that’s existed over the past few years, I haven’t been holding my breath.  Whether it’s HAMP, HARP, the Hardest Hit Fund, or any other random acronym, I’ve seen too little help being extended to my clients or homeowners in general.  These programs have been all hype and no impact.  So when the National Mortgage Settlement was announced, it didn’t change my approach to foreclosure defense or the advice I give clients in the slightest bit.

Occasionally, I encounter homeowners who question my skepticism.  They cite the requirement in the National Mortgage Settlement that the big banks write down the balances owed on mortgages.  My response?  “I’ll believe it when I see it.”

Now that some time has passed since the National Mortgage Settlement, we’ve had a chance to evaluate what the banks have been doing.  (Bear in mind, as you read this, the National Mortgage Settlement is what our nations leaders agreed to accept in lieu of pursuing the big banks for criminal charges and untold civil penalties.)  Unfortunately, but not surprisingly, it’s not good.  Instead of reducing principal on owner-occupied properties to keep homeowners in their homes, most of the “reductions” that the big banks have been offering have been in the short sale context.  “Sell your house, and we’ll forgive the deficiency.”  In other words, “sell your house, give us money, and we won’t make you give us more money.”

As if that’s not bad enough, many of these “reductions” have been given in non-recourse states, i.e. states where the banks cannot collect the deficiency as a matter of law.  Real nice, eh?  You see, unlike Florida, where banks can pursue deficiencies against homeowners, in states like California, the banks aren’t allowed to collect a deficiency – their sole remedy upon a default in mortgage payments is to foreclose and get the house.  If the house is worth $300,000 and the amount owed is $500,000, it doesn’t matter – the bank is limited to the $300,000 house.  (In Florida, by contrast, the additional $200,000 would still be owed.)

So what have the banks been doing to “comply” with the National Mortgage Settlement?  In non-recourse states like California, banks have been entering short sale agreements and “reducing” the balance owed to $300,000, “eliminating” the deficiency and applying those “reductions” towards their debt reduction obligations in the National Mortgage Settlement.

Keeping homeowners in their homes?  Pfft.  Offering real relief?  No way.  Why would the banks do that when they can ”comply” with their debt reduction obligations by eliminating debt that they’re not allowed to collect anyway?

Apparently, people have started to catch on to this utterly perverse system (implemented by 49 of our AGs and the federal government, mind you), voicing appropriate complaints.  Perhaps realizing they’ve been caught, and trying to create at least the impression of compliance, the banks have reacted.  In fact, every so often, I’m starting to see some of the bigger banks – Citi, JP Morgan Chase, Bank of America, GMAC, and Wells Fargo – reduce or even eliminate mortgages for some homeowners.  Yes, you read that right … every so often, these big banks are reducing the amounts owed on mortgages.

Before you get excited, I must immediately caution you.  Curb your enthusiasm.  These principal reductions have been very rare and, frankly, completely random.

Understanding how this process works requires that you begin with one basic premise – these banks have no desire to actually help homeowners.  Hence, there is no methodology to the implementation of these principal reductions.  Is it limited to homestead or owner-occupied properties?  No.  Is it being offered to homeowners with the greatest need, e.g. the elderly or those stricken with cancer?  No.  You see, those are some criteria that might be implemented if the banking industry gave a damn and was actually trying to help people.  But they don’t, so no such criteria exist.

The principal reductions I’ve seen from the big banks – as infrequent as they’ve been – are totally random.  In fact, as best I can tell, they’re being offered solely so the banks can say they’ve reduced debt, without actually reducing debt they intend to collect.

For instance, in Florida, it’s relatively common to settle foreclosure lawsuits by the bank agreeing to waive deficiency in exchange for the homeowner consenting to foreclosure.  This doesn’t happen all the time, of course, and I believe it’s much more likely if you defend your foreclosure case so as to gain some leverage to induce the bank to compromise, but it does happen.  Hence, if the banks eliminate deficiencies, that may sound good, but if it’s something they were going to do anyway, should that really count towards their debt reduction obligations in the National Mortgage Settlement?  That’s not the banks doing something good – that’s them doing something they were going to do anyway, for their own business purposes, and labeling it as something good to “comply” with the National Mortgage Settlement.

Another thing that irritates me about the banks reducing debt in the short sale context is that, quite often, this debt can be eliminated through bankruptcy anyway.  Banks know this, and that’s why, in the rare instances I’ve seen principal reductions, they’ve occurred on debts that could have been eliminated through bankruptcy anyway.

For instance, I had one client whose second mortgage was completely eliminated.  Poof.  That sounds great, but that client is still underwater on his first mortgage and is still looking at a bankruptcy.  Hence, what did eliminating that second mortgage really accomplish?  Banks often don’t pursue second mortgages anyway, and even when they do, those mortgages will be foreclosed when the first mortgage forecloses and the personal liability can be eliminated through bankruptcy.  In other words, that principal “reduction” may sound nice, but was it designed to keep that homeowner in his home?  Heck no.  In fact, that principal reduction was completely unsolicited – the homeowner didn’t even ask for it.  Does that sound like a bank that’s trying to help, or a bank that figured out, internally, which debts were the best to eliminate for its own, internal purposes?

A recent article in the St. Pete Times listed out the names of these big banks and some phone numbers to call.

Ally Financial/GMAC:  Toll-free 1-800-766-4622

Bank of America: 1-877-488-7814

Citigroup: 1-866-272-4749

J.P. Morgan Chase:  1-866-372-6901

Wells Fargo: 1-800-288-3212

Despite my pessimism, I’m never going to discourage any of my clients or any homeowner from calling to try to get this relief.  Call.  There’s no harm in calling, I suppose (except to the extent your case has been in hibernation mode and your call wakes up the sleeping giant).  That said, when I assess the chances of these calls doing any good, I can’t help but think of the famous line from Dirty Harry … Do You Feel Lucky, Punk?

Why that line (aside from it coming from Clint Eastwood, who was just in the news)?  The way I see it, for your pleas to the bank to work, you’ve got to be lucky.  Really lucky.  And I like the term “punk” in this context because we’re all punks.  We’ve all been punked by the big banks.  They screwed over America, avoided liability for their misdeeds under the National Mortgage Settlement, and when it came time to pay, they punked us all.

So go ahead and call.  Just remember Clint Eastwood’s famous line, and when your pleas go unanswered, remember why I’ve put so little stock in every government program that’s come into place in the past several years.

Mark Stopa

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