Homeowners vs. Bankers – Tug of War, in quicksand
The foreclosure crisis has spawned a myriad of headline-grabbing, national stories. Foreclosure fraud. Robo-signers. Strategic default. Many brilliant Americans are trying to figure out how to solve the problem. Finding the solution begins with understanding the problem.
As a foreclosure defense attorney on the “front lines” of the crisis every day, I believe the problem is much simpler than people realize. Homeowners and bankers are in a Tug-of-War. On one side of the rope, homeowners are pulling, trying to get loan modifications. On the other side, bankers are pulling, trying to finalize foreclosures.
Homeowners vs. Bankers
(I have homeowners on the left because they’re clearly the underdogs, struggling with inferior resources. The bankers are on the right due to their vast resources, aided by the bailout from the government.)
Everything we’ve seen in the foreclosure crisis falls under the umbrella of this Tug-of-War. In my view, it started with the bail-out of the banks, so let’s start there.
1. In 2008, with our nation’s economy in the toilet, the government bailed out the banks, intending to spur lending and stimulate the economy. But the bankers don’t modify loans.
Government Bails Out Bankers ==> No Loan Modifications.
2. The lack of loan modifications spawned more defaults by homeowners and unprecedented increases in the volume of foreclosures.
No Modifications ==> More Defaults & More Foreclosures
3. Faced with higher volume, bankers instituted questionable procedures to cut corners. Robo-signers. Foreclosure fraud (or, at minimum, neglect).
No Modifications ==> More Foreclosures ==> Bankers Cut Corners
4. Without modifications, and facing foreclosure, homeowners fight back, hiring foreclosure defense attorneys (particularly in states like Florida, which require judicial oversight).
No Modifications ==> Homeowners fight back, Hire Lawyers
5 Foreclosure defense attorneys help homeowners, uncover fraud.
No Modifications ==> Homeowners Hire Lawyers ==> Bankers’ Fraud Exposed
6. As this whole process continues, the real estate market and economy as a whole continue to stagnate. The ongoing Tug-of-War is being played in quicksand – both sides are pulling, and everyone is sinking.
More and more Americans wonder why they should pay they should pay their mortgage when a house down the street is selling for 40% of the mortgage. It’s the advent of strategic default.
No Modifications ==> Strategic Default
7. Not wanting everyone to default, bankers still refuse modifications. (This is one of the big perversities of the system. Bankers will never admit it, but the single biggest reason they won’t modify loans is they don’t want to incentivize all of the homeowners who are current on their loans to go into default.)
No Modifications ==> Strategic Default ==> No Modifications
8. Meanwhile, in states with judicial oversight of foreclosures, like Florida, judges see their caseloads quadruple, essentially overnight, prompting unprecedented procedural changes, and, in many circles, skepticism in the judiciary (due to the increasing perception that courts have enabled the foreclosure fraud).
No Modifications ==> Higher Volume ==> Strain on Judiciary
Now we sit, in October, 2010, with terms like robo-signer, moratorium, and foreclosure-gate a part of daily conversation. The Tug-of-War is now more intense than ever. Public debate rages about which side is right – the bankers or the homeowners, each side growing larger in number and getting more entrenched in their respective positions. Meanwhile, high-ranking officials try to solve the problem, struggling to come up with a solution.
Respectfully, the solution is simple. AMERICANS NEED LOAN MODIFICATIONS. Let me shout it from the rooftops:
AMERICANS NEED LOAN MODIFICATIONS
I’ve blogged on this website repeatedly about the problems with the loan modification process. If the government has any intention of fixing the mess, and the economy as a whole, it must find a way to force banks to modify loans. A few suggestions:
1. Every time a bank forecloses, impose a tax. A stiff one. Make the tax pro rata based on the value of the property. “You want to foreclose, bank. Fine. Pay $25,000. Or $50,000.” If bankers won’t modify loans, incentivize them to do so by hitting ‘em where it hurts – the wallet.
2. Reduce the principal on every owner-occupied property to its present value. I made this suggestion on this blog weeks ago, before Foreclosure-Gate became a national phenomenon. Yes, it’s a drastic suggestion, but this would drastically reduce strategic defaults, eliminate the backlog in our courts, and make mortgages affordable again. The bankers got bailed out (and didn’t help homeowners at all) – it’s time to bail out the people. Bankers may argue this is unfair, but I’d counter that this would stabilize housing prices, spur home sales, and get homeowners to start borrowing again.
3. Require judicial oversight of foreclosures in every state. If it’s harder for banks to foreclose, it will give them incentive to work out loan modifications.
4. Require banks to attempt modifications as a condition precedent to foreclosure. More importantly, make the banks prove that they complied with these conditions, to a judge, even in uncontested cases, before they can begin a foreclosure suit.
Until some such actions are taken, the Tug-of-War will continue. So if you’re a homeowner facing foreclosure, unable to get a loan modification, you really have little choice but to retain a competent foreclosure defense attorney, fight your foreclosure, and see what happens in the court system. At worst, you’ll be able to stay in your home a bit longer, and, hopefully, get back on your feet.
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