Posts Tagged ‘foreclosure defense attorney Tampa’

Judge Laments “Idiocracy” of Banks; U.S. Government to Blame

I hope you haven’t eaten yet today, because when you read this, you’re going to be sick. 

Today’s St. Pete Times details the story of Saji Mathew, who owns a Mobil gas station in Pinellas County.  On October 13, 2010, Mr. Mathew went to pay his monthly mortgage payment to BB&T, which was due on October 12.  BB&T refused to accept it.  Mr. Mathew has been trying to pay, in full, ever since, only to have his payments rebuffed. 

Yesterday, he tried again, in court before St. Pete Judge Amy Williams.  Despite his willingness to pay more than $50,000, the bank once again refused.  This prompted Judge Williams to express some well-founded frustration:

All the people that understand anything about mortgage foreclosures need to know this stuff,” Circuit Judge Amy Williams said in court. “This is the idiocrasy of this stuff. This is why we’re in a worldwide financial crisis because there’s no business sense any more in the foreclosure industry, none. And it blows my mind. Totally blows my mind.

The article goes on to explain that there must be “some financial incentive” for BB&T not to accept these payments, but is unsure what it is. 

Well, I’ve awwn this fact pattern before, and I know what it is. 

As the article reflects, this loan originated with Colonial Bank, which was taken over by the FDIC, which then gave the loan to BB&T. 

Want to know why BB&T won’t accept Mr. Mathew’s payments?  It’s simple.  BB&T wants to have the entire loan balance paid in full.  And it knows it will, one way or the other.  You see, one of two things will happen here.  Either Mr. Mathews is collectible, and will be forced to pay a deficiency judgment to BB&T in full (once the foreclosure is finalized) … or Mr. Mathews is not collectible, and the FDIC will pay the judgment to BB&T in full.  Either way, BB&T will collect, in full. 

So that’s the dynamic at play here (and in countless other cases) – BB&T would rather refuse the monthly mortgage payments because it knows it can collect, in full, courtesy of the U.S. Government. 

If you think I’m speculating here, you’re wrong.  I’ve had cases recently where this exact dynamic was discussed openly and repeatedly.  When BB&T obtains a judgment on a Colonial Bank loan, it gets paid by the FDIC so long as it proves to the FDIC that (1) the judgment debtor is uncollectible; or (2) the judgment debtor is in bankruptcy.  That’s it.  What precipitated the default and the judgment is irrelevant … even if the default was minor and the owner can make the monthly payments, that’s irrelevant – BB&T gets paid in full by the FDIC. 

So, if you’re like many other Floridians wondering why BB&T refuses to accept Mr. Mathew’s payments, wonder no more.  Quite simply, BB&T would rather foreclose, and collect from the FDIC, than continue accepting his monthly payments. 

If you agree with me that this dynamic is perverse and disgusting, do something about it.  Complain to your Congressman.  Talk to the media.  It’s up to you and me to stop this insanity. 

Here’s the article.  …

ST. PETERSBURG — Saji Mathew missed the Oct. 12 mortgage payment on the Mobil gas station he co-owns.

On Oct. 13, he took the money to the bank, thinking that would make things right.

He tried to make his November and December payments as well. But each time, BB&T kicked back his money.

Ten months later, Mathew is still trying to pay. In circuit court on Tuesday, he offered BB&T $50,000, the total amount due since October.

BB&T didn’t want the money.  It wants the gas station.

“They won’t take my money,” said Mathew. “I want them to take it. I was one day behind paying the mortgage.”

BB&T’s stance flabbergasted the judge in the case.

“All the people that understand anything about mortgage foreclosures need to know this stuff,” Circuit Judge Amy Williams said in court. “This is the idiocrasy of this stuff. This is why we’re in a worldwide financial crisis because there’s no business sense any more in the foreclosure industry, none. And it blows my mind. Totally blows my mind.”

• • •

Because the case is pending, the judge could not elaborate on her frustration.

But as thousands of property owners across Florida and the nation battle foreclosure, defense attorneys accuse lenders of bogging down courts with an unwillingness to negotiate with people on their mortgages, often by simply refusing to make decisions.

St. Petersburg lawyer Matt Weidner said attorneys across the country fight these types of cases everyday.

“It’s an example of the mess that has been handed to our judges and courts,” he said. “It’s an impossible mess to clean up.”

Mathews bought the station in 2001. He bought the property in 2003. Court filings detail his side of the story.

In 2009, he signed a $504,000 mortgage with Colonial Bank. The deal allowed the bank to withdraw the $4,964.93 mortgage payment on the 12th day of each month. Months later, Colonial failed. BB&T acquired the mortgage.

Late last summer, Mathew spent $75,000 for new underground storage tanks at the station. That led to a cash flow problem in October.

On Oct. 12, BB&T tried to withdraw the mortgage payment from the gas station’s account, which lacked sufficient funds.

Mathew deposited money the next day. Because the bank had sometimes not taken the payment until the 14th of the month, Mathew said he assumed everything would be okay.

Instead, on Oct. 25, he received a late notice. Mathew said he visited the bank, where a representative told him the payment would be reprocessed. Eleven days later, Mathew received a notice demanding $5,243 for the October payment, which included a penalty.

Mathew said he did nothing because the bank employee had already told him the October payment would be reprocessed. On Nov. 20, a BB&T attorney sent Mathew a letter demanding the total amount remaining on the loan, $473,000.

Mathew said he contacted the bank but was told it wouldn’t deal with him because he was involved with another company in an unrelated BB&T foreclosure in Charlotte County. He contacted the bank’s attorney, who directed him back to BB&T.

Mathew made mortgage payments in November and December. The bank refunded them and filed foreclosure on Dec. 20.

• • •

In court this week, Ronald Bruckmann, a Miami lawyer representing BB&T, insisted that the bank had the right to demand repayment of the entire loan amount once Mathew missed a payment.

Mathew’s attorney, Brian Gray of Fort Lauderdale, disagreed. He told the judge that Mathew has had the ability to pay each month.

“They accepted subsequent payments and then subsequently refunded those payments to him,” he said. “Gave him the runaround, and that’s why we’re here today.”

Judge Williams ordered BB&T to place the $50,000 in a trust account or into the Clerk of Courts’ registry account until the case is settled.

In a telephone interview, Gray said he doesn’t understand BB&T’s motives for not accepting the money. He stressed that Mathew doesn’t want the loan modified. He simply wants to pay what he always paid.

“The bank would rather drive (Mathew) into foreclosure,” he said. “There’s got to be some financial incentive for them to not work with my client. This is disturbing, especially in this economy. It is really wrong.”

Bruckmann declined to comment.

Mathew vows to fight the foreclosure at a trial set for December.

“This is devastating,” he said. “This is all I have. This is how I make my living.”

Mark Stopa

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Loan Modification Fraud – Fighting Back!

I’m pleased to read this decision from Florida’s First District Court of Appeal.  The ruling says, essentially, that when banks mislead homowners into believing their foreclosure lawsuit will be “on hold” while their loan modification is being reviewed, then obtain a Final Judgment of Foreclosure anyway, the foreclosure should not stand.  That seems fair – why should a bank be able to lie and say a foreclosure is “on hold” and get a foreclosure anyway?  I see two lessons to be learned here:  (1) if the bank tells you your foreclosure case is “on hold” while your modification is being reviewed, don’t believe it; and (2) banks cannot obtain a foreclosure judgment if they’ve misled you in this way, so if this happened to you – fight back! 

Although the court’s ruling is largely good, I’m still a bit disappointed.  This sounds technical, but you may notice how the Court reversed the foreclosure but “remanded” for an evidentiary hearing on the motion to vacate the foreclosure.  This means that the appellate court directed the trial court to conduct an evidentiary hearing, i.e. a hearing with live testimony, to evaluate the merits of the motion.  Unfortunately, this leaves open the possibility (as crazy as it sounds) that the lower court could deny the motion even after this appellate ruling, keeping the foreclosure judgment in place. 

Respectfully, this aspect of the decision is just plain wrong.  The court’s decision reveals that the bank presented no evidence in opposition to the motion.  In other words, it was undisputed that the bank deceived the homeowner into believing the foreclosure would be “on hold” while the modification was being reviewed – the homeowner presented an affidavit establishing that fact and the bank presented nothing in opposition. 

With respect to the judges who wrote this decision, the purpose of an evidentiary hearing is for courts to resolve disputes in the facts.  Where only one side presents affidavits, there are no disputes in the facts, so there is no need for an evidentiary hearing.  In other words, the homeowner’s affidavit was undisputed, so thoat affidavit should have carried the day, and the motion should have been granted, without the need for an evidentiary hearing (and without any possibility that the motion could be denied).  

There are legions of cases about this.  I’ve seen many lawyers, even judges, misunderstand this rule of law, but it’s not that complicated.  When the bank and a homeowner present affidavits with conflicting facts, the judge must conduct an evidentiary hearing, i.e. a hearing with live testimony, and decide who he believes.  If only one side presents an affidavit, however, that side’s affidavit controls and there is no reason for live testimony. 

For example, if the homeowner signs an affidavit that the traffic light was red, and the bank signs an affidavit saying the traffic light was green, the judges must conduct an evidentiary hearing.  But if the homeowner signs an affidavit that the traffic light was red, and the bank does not present an affidavit, the judge has to conclude the traffic light was red. 

It works the same way with loan modifications.  If the homeowner presents an affidavit that the bank deceived them into believing the foreclosure lawsuit was “on hold,” and the bank presents no affidavit, the judge must conclude that the bank deceived the homeowner.

Mark Stopa

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Beware of title problems as foreclosure sales resume

Shannon Behnken of the Tampa Tribune covered the story about Fannie and Freddie resuming foreclosure sales the right way – by reminding everyone: (1) flooding the market with properties will further drive down real estate values; and (2) there are significant concerns about the validity of title being conveyed by properties in foreclosure sales.  

Here’s the article:

TAMPA – Mortgage giants Fannie Mae and Freddie Mac have lifted their ban on selling foreclosed homes, which could potentially double the number of these homes available for sale in the region.

That could be good news for home buyers who now have a lot more options. But flooding the fragile real estate market with distressed homes will further push down prices, some industry leaders say, and make it more difficult for traditional home sellers to compete.

Some question whether buyers will even want the foreclosed homes.  With allegations of foreclosure fraud still unsettled, can buyers trust they’re getting these homes free and clear? Do they have to worry that later – even years later – the previous homeowner could sue to get the house back?

“If you pick a random case, the chances are good that there won’t be a title problem,” said Mark Stopa, a Tampa foreclosure defense attorney. “But I wouldn’t be surprised if there are 50,000 cases in Florida where the previous homeowner would have a valid claim to void the foreclosure.”

Fannie and Freddie together hold about half of the foreclosed homes in Florida. Both of them halted sales of foreclosures in September, amid revelations that servicers were signing key foreclosure documents without reading them or verifying the information was true, as required by law.

There also are accusations that some firms hired to serve homeowners with lawsuits failed to notify them. Some homeowners say they thought they were working on loan modifications with their lenders only to find out later that the home was already sold in foreclosure.

In those cases, foreclosure defense attorneys say, judges could reverse foreclosures, causing title problems for buyers who purchased these homes.

Stopa is representing two former homeowners who are suing to get their homes back. In both cases, the plaintiffs say they weren’t given the chance to defend themselves in court.

In one case in Pinellas County, Michael D. Carlson has asked a judge to undo a foreclosure judgment against him from 2008. He says he didn’t know about the foreclosure proceeding on his Dunedin rental home until he went to check on the house and found the bank owned it.  Bank of America sold the home more than a year ago to another family, Stopa said, and they had every reason to believe they owned the foreclosed property free and clear.

The Carlson case represents “the perfect storm” and a home buyer’s worst nightmare, said, Peter Murphy, a consultant with Tampa-based Home Encounter, a real estate consulting firm and brokerage that tracks local real estate trends.  Buyers can never be sure there won’t be a challenge to the title, Murphy said, but title insurance should protect them from liability.  “Now that doesn’t mean they’ll get to keep the house if there’s a challenge to the title and, yeah, that’s unnerving,” he said.

Home sales in the Tampa-St. Petersburg-Clearwater area plummeted 25 percent in October, compared to a year ago. Real estate agents said the foreclosure moratorium was partly to blame because some pending deals fell through.

Putting the homes on the market all at once will cause home prices to drop, but Murphy said he thinks it’s better to get it over with now.  “If you wait, neighborhoods and homes will further deteriorate,” he said. “I don’t think homes will fly off the market, though, because people are fearful as to what will happen in the economy.”

Vernon Taylor, president of the Greater Tampa Association of Realtors, said he’d “be nervous to buy a foreclosed home.”  “Buyers don’t want to go through this hassle and find out later they have a problem,” he said.  Even so, Taylor agreed with Murphy that it’s best for the market to work through the inventory now, not later.

Mark Stopa

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Foreclosure Seminar – Thank you

Thank you to everyone who attended yesterday’s foreclosure seminar at the Tampa Convention Center.  To Matt Weidner, thank you for your terrific presentation and leadership in the foreclosure fight.  To my terrific staff, thanks for giving up your Saturday; it couldn’t have happened without you.  And to the hundreds of Florida homeowners who attended,  thank you for your interest, your passion, and your willingness to come out from the shadows and fight back. 

Homeowners, please keep spreading the word about the issues we discussed.  We’ve come a long way in the foreclosure fight, but most Floridians still don’t realize the rights they enjoy as homeowners or how the foreclosure process actually works.  Worse yet, many are still hiding in shame.  We just can’t let that happen any longer – if anything, the banks are the ones who should be hiding in shame.  Please help educate your friends and neighbors – not just about the process, but to hold their heads high as they fight for their rights.

If you couldn’t attend, Stopa Law Firm will be sponsoring a similar seminar in the future, so be on the lookout for that.  And thanks again to all involved.

Mark Stopa

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Phone Appearances in Foreclosure Cases

As a foreclosure defense attorney, I overwhelmingly prefer to attend hearings in person.  There’s something to be said for getting to look the judge in the eye as I make my argument, and I like being able to hand the judge copies of documents and case law when necessary.  Basically, all else equal, I prefer attending hearings in person rather than by phone.  

That said, there are instances when phone appearances make sense.  Some hearings, quite candidly, are less significant than others, and for such hearings, it often makes sense to appear by phone.  For one, it’s certainly more convenient.  More importantly, the unfortunate reality is that, as a foreclosure defense attorney, many of my clients don’t have a lot of money.  When clients are operating with a limited budget, I try to make that budget stretch as far as possible, and sometimes that means attending less significant hearings by phone. 

Fortunately, the Florida Supreme Court has envoked a Rule of Judicial Administration – Rule 2.530(c) – that facilitates phone appearances.  The rule says, essentially, that for all hearings of 15 minutes or less, the judge “shall” allow phone attendance “absent good cause.”  In my experience, requests to appear by phone are routinely granted in most Florida counties.  Essentially, there is almost never “good cause” to preclude a phone appearance, particularly if a hearing is brief and does not require the presentation of evidence. 

Unfortunately, a few counties in Florida, including Orange and Lee, have issued administrative orders that preclude phone appearances in all foreclosure cases.  Respectfully, I find this procedure out of line.  As I see it, the chief judges of Orange and Lee (and any other counties that have issued such an administrative order) cannot create a rule that contravenes Rule 2.530.  The Florida Supreme Court has created Rule 2.530 pursuant to its exclusive authority to envoke rules of practice and procedure in all Florida courts, an authority expressly granted to it by Article V, Section II of the Florida Constitution.  It’s not within the powers of a circuit court judge, even a chief judge, to apply a blanket rule that contravenes Rule 2.530. 

In a recent case, I decided to push this argument.  I filed a motion to attend a hearing by phone in Orange County, which, in light of the administrative order, the judge denied.  However, I then filed a motion to stay the hearing pending appellate review, which the judge granted.  I then filed this Petition for Writ of Certiorari or Mandamus, laying out the argument I just made, above, with some legal authority in support. 

You may not think this is earth-shattering news, but check out footnote three of the Petition.  Candidly, I’m concerned that some judges issue administrative orders precluding phone appearances with the specific intent of making it harder for foreclosure defense attorneys to represent clients, making it easier for them to “push through” foreclosure cases.  That sounds harsh, but some of these judges actually set hearings on their own, without clearing the date, and order me to personally attend, even knowing I’m out of town.  With all due respect, that’s wrong.  And respectfully, I’m not going to be bullied into foregoing legal representation of clients who need my help.  Hence, I consider this Petition for Writ of Certiorari or Mandamus my most recent attempt at curbing the perverse judicial procedures that permeate foreclosure cases in Florida.  For me, it’s not just an issue of appearing by phone – it’s forcing judges to follow the law and ensuring my ability to represent homeowners in all foreclosure cases.

Mark Stopa

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How Loan Modifications Cause Foreclosure

It’s bad enough that the loan modification process is not helping homeowners as intended, a failure I’ve reported in this blog many times.  Unfortunately, it’s even worse than that.  As numerous media outlets are now reporting, and as I’ve seen in my daily practice as a foreclosure defense attorney in Florida, temporary loan modifications often *cause* a homeowner who was otherwise not behind on mortgage payments to go into foreclosure.  

The New York Times has a real-life story, but here’s the simplified version:

The homeowner is making monthly mortgage payments as required, but finances are tight.  The homeowner asks the bank for a loan modification.  The bank says it needs to review the homeowner’s financial information to make a decision, but agrees to a temporary modification while the application is being reviewed.  The homeowner’s payments are temporarily reduced from $1,500/month to $1,000, pending the review process, which the bank says should take a couple of months.  The homeowner diligently makes the $1,000 payments each month and anxiously awaits approval on the permanent modification.  The process seems simple enough, so the homeowner is optimistic. 

Two months turn into six, then eight, then ten.  The homeowner keep making the required $1,000/month payments, never imagining it would drag on this long.  The homeowner keeps calling, and the bank keeps saying the permanent modification is being reviewed.  Then, bam.  The bank rejects the permanent modification, without explanation (or a flimsy explanation that shouldn’t have taken 10 months to disclose).  But instead of telling the homeowner to resume the $1,500/month payments, the bank requires the homeowner pay all of the arrearages.  In other words, the $500/month that the homeowner didn’t have to pay while the modification was being reviewed – those monies need to be paid, all at once, in one lump-sum, plus interest, late fees, attorneys’ fees, etc.  When the homeowner can’t/doesn’t pay that $7,500 lump sum (10 months x $500/month = $5,000, plus $2,500 estimated interest, late fees, etc.), the bank pursues foreclosure. 

This sounds impossible to believe, but this phenemonon is happening to homeowners all across the country.  Please, don’t fall prey to such “gotcha” tactics.”  Retain a foreclosure defense attorney to assist you through this process.

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Judges Cannot Prosecute Foreclosure Cases; My Solution

Several days ago, I blogged about the flawed procedures being utilized in foreclosure cases in Brevard County, precipitating this Motion to Disqualify Judge.  Since filing that motion, I’ve continued to reflect on the issues addressed therein, and I remain comfortable with my position.  In my eyes, the issue boils down to one inescapable conclusion:

Judges cannot prosecute foreclosure cases!

Today, the Brevard judge agreed with my argument and issued this Order Granting Motion to Disqualify.  The Order is quite vanilla, but it contains a phrase that I find telling.  The judge notes that “from Defendant’s perspective,” the Motion to Disqualify is legally sufficient and requires disqualification.  The key phrase, of course, is ”the Defendant’s perspective.” 

From the Defendant’s perspective, when a judge takes it upon him or herself to set a hearing in a case that the Plaintiff has chosen, for whatever reason, to let stagnate, the judge is siding with the Plaintiff.  A judge may argue (and may truly believe), that all he/she is doing is advancing the case forward, without bias towards one party or the other with regard to the hearing being scheduled.  Particularly in foreclosure cases, though, it’s the mere advancement of the case, at the judge’s initiative, that reflects the bias.  After all, the Plaintiff is seeking relief in the case; the Defendant is not.  Hence, when the judge is advancing the case, sua sponte, the judge is necessarily helping one party to the detriment of the other. 

Let’s put it this way … If a case is languishing, whose job is it to advance the case forward, towards judgment?  The Plaintiff.  Undoubtedly, the Defendant has no obligation in this regard.  I’m not saying the Defendant can stall; I’m saying the Defendant has no obligation to accelerate the case if the Plaintiff lets it stagnate.   

Some people reading this may argue I’m a slimy foreclosure defense attorney who’s just trying to delay foreclosure lawsuits.  Not so.  My concern is ensuring the system is fair for my clients.  Lest you doubt that a judge setting a hearing on his/her own initiative is unfair, consider this:

I’ve represented Plaintiffs and Defendants in hundreds if not thousands of lawsuits throughout my career – all types of lawsuits, not just foreclosure cases.  Other than recently (in the context of foreclosure cases), I can’t ever recall a judge setting a hearing on his/her own.  It’s just not done.  For example, I’ve filed dozens of lawsuits for Plaintiffs against insurance companies, seeking monetary relief.  I think most of my litigation clients would tell you that I litigate those cases aggressively, but, on occasion, for one reason or another, some of those lawsuits have languished a bit.  When that happens, do you think there’s ever been a time when a judge took it upon him or herself to set a hearing?  Of course not.  Do you think the judge ever tells the insurance company or its lawyer that they need to accelerate the case?  Yeah, right.  Never happens.  As the Plaintiff’s lawyer, if I don’t set a hearing, the hearing never gets set, and the case stagnates.  That’s just how it works.  The insurance company has no obligation to advance the case forward (and risk entry of an adverse judgment sooner), nor would I expect them to.  My client wants affirmative relief through the court system; it’s my duty to move the case forward to obtain that relief. 

My point, essentially, is this – when this is how it works in litigation files, why should foreclosure cases be any different?  Because the homeowner (allegedly) has not paid?  Because the judge perceives the Plaintiff will win?  Because the Judge has a lot of cases on his/her docket and wants to remove the backlog?  Respectfully, that’s the rub.  If a judge is setting a hearing on his/her own initiative, for any of those reasons, it reflects a bias that should not be present among the judiciary.  Judges should treat my clients just like they treat insurance companies when I represent Plaintiffs – without any preconceived notions of who is going to win the case and without any agenda as to how quickly the case moves forward.

I can totally understand the judges’ desire to eliminate the high volume of cases with which they are dealing.  The answer, though, isn’t for judges to exceed their role as neutral arbiter and act as prosecutor.  The solution is to change to the rule on lack of prosecution. 

Fla.R.Civ.P. 1.420(e) is currently set up in such a way that it’s virtually impossible, as a practical matter, for a case to be dismissed for lack of prosecution.  For such a dismissal to be entered, (1) there can be no activity in the court file at all for 10 consecutive months; (2) the Plaintiff must be notified of the lack of record activity; (3) there must be no record activity in the ensuing 60 days; (4) an interested party must seek dismissal; and (5) there can be no “good cause” to prevent dismissal.  Under this standard, cases can languish forever.  I can file a Notice that I’m going on vacation for Christmas, and the 10-month clock starts all over again.  Respectfully,that’s crazy, particularly vis a vis foreclosure cases. 

If the judiciary wants cases to move quicker, it’s time for the Florida Supreme Court to implement an amendment to this rule.  How about something like … if six months have passed with no record activity in a foreclosure case, then, boom – automatic dismissal.  If that sounds too harsh, then give the Plaintiff a chance to prove good cause after six months.  The point isn’t how the rule is amended; the point is that some amendment is necessary to ensure that foreclosure cases progress at the pace the judiciary desires.  In other words, what I’m suggesting is this:

Judges, don’t prosecute foreclosure cases just because the bank has let those cases languish.  Instead, convince the Florida Supreme Court to amend Rule 1.420 so it’s not so impossible to dismiss a foreclosure lawsuit for lack of prosecution. 

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Strategic Default and Bankruptcy – Where is Florida Headed?

The ongoing and systematic refusal by banks to enter meaningful loan modifications with homeowners will have long-term consequences that the average American cannot yet imagine.  Just try to picture it…

Imagine your typical American family.  Married couple, two kids.  Earn $40,000 per year.  Own a house worth $150,000 but owe $250,000.  Have two cars, a small amount of savings/retirement money, and $10,000 in unsecured debt (credit cards).   The numbers can vary, but you get the picture – your typical, middle-class family that’s making ends meat but not much else. 

There’s a strong argument to be made, for such a couple, that it’s in their best interests to strategically default, i.e. stop paying on their mortgage, defend their ensuing foreclosure lawsuit, and file a bankruptcy (Chapter 7 or Chapter 13, depending on their circumstances).  Each situation is different, but in all likelihood, this would drastically reduce or eliminate their credit card debts, drastically reduce or eliminate the deficiency on their mortgage (the $100,000 difference between what they owe on their home and what it’s worth), enable them to save money while their foreclosure case is pending, and give them a “fresh start” if/when the foreclosure is finalized. 

For instance, suppose the foreclosure lawsuit were to take a year to conclude (a conservative estimate in light of recent reports out of Palm Beach that the average case takes 18 months), and their mortgage payment was $1,500 per month.  With those figures, this couple would accumulate $18,000 in savings, merely by not paying their mortgage while the foreclosure lawsuit was pending ($1,500 x 12 = $18,000).  If they completed a bankruptcy, they could keep this $18,000 if/when the foreclosure case was over.  The $250,000 debt on the house?  Poof – gone (or substantially reduced).  The $10,000 in credit card debt?  Poof – gone (or substantially reduced).  Sure, this couple would lose their house, but what was the house really worth anyway?  As I see it, and I suspect most accountants would agree, losing a house worth $150,000 when you owe $250,000 means you eliminated a $100,000 liability.  Hence, the liabilities are gone, but the $18,000 – that’s the couple’s money to keep. 

Now imagine the foreclosure case takes two years instead of one.  Again, no way to know for sure, but given what I’m seeing in Florida, it’s certainly within the realm of possibilities.  In that event, the couple would have $36,000 when the foreclosure lawsuit ends in two years.  Think about that.  $36,000 cash and little or no debt (depending on the type of bankruptcy), and all you had to do was defend your foreclosure case and file bankruptcy!  And it’s all perfectly legal! 

With this example in mind, who wouldn’t want to strategically default?  I realize there are strong moral arguments not to do this, but let’s put aside morality for a moment and view this purely from a purely financial perspective. (That’s not terribly unreasonable, since that’s what the banks typically do.)  Isn’t it clear this couple would be better off by strategically defaulting on their mortgage, defending the foreclosure lawsuit, and filing bankruptcy?  In other words, isn’t it better to eliminate most or all of your debt, save up money, and have $18,000 or $36,000 or whatever amount in your pocket, and start fresh, than to owe $100,000 more on a house than it’s worth and credit card debt?  Heck, in today’s economy, $18,000 or $36,000 (or whatever amount you were able to save) could buy you a house, free and clear.  As such, it may be possible to convert your $250,000 mortgage into a free and clear house by doing nothing except strategically defaulting on your existing mortgage, filing bankruptcy, and retaining a competent foreclosure defense attorney to defend your foreclosure lawsuit. 

Now the staggering thought – there are literally millions of Florida homeowners in this type of situation.  Sure, there are plenty of Floridians who aren’t realistic candidates for bankruptcy because they have too many assets, too much income, or both.  In today’s economy, though, such people seem to be few and far between.  As such, what percentage of Florida homeowners could strategically default, stop paying their mortgage, file bankruptcy, and be better off?  40%?  50%?  More? 

Now, try to imagine what our country’s financial system will look like if this happens.  Imagine half of all Floridians with a mortgage – or half of all Americans with a mortgage – go into default.  If that happens, what will our financial sector look like?  Will big banks even exist?  What will property values fall to?  What will our court systems look like?  These are staggering questions for which there is no clear answer. 

Now a tough question – should the typical Florida homeowner care?  In other words, to what extent should homeowners continue paying their mortgages for the “good of society,” even to their own detriment?  Undoubtedly, there are arguments to be made on both sides of this issue as well.  Given society’s “me first” attitude, though, I’m confident many people will disregard the impact on society and embark on this path.  Hence:

As things now stand, millions of homeowners will choose a strategic default.

Avoiding this consequence should be the primary objective of the U.S. government.  Quite simply, our government must step in and do something to ensure that everyone doesn’t have the incentive to strategically default.  Our economy and financial sector as a whole will not be able to function if so many Americans have the incentive to stop paying. 

How does one go about this?  The problem, in my eyes, goes back to the absence of meaningful loan modifications.  People have the incentive to default because they see that a bankruptcy court would eliminate or reduce their debt and nobody else, i.e. the banks, is willing to do so.  Using the example above, if the banks reduced the mortgage to $150,000 or even $175,000, maybe that homeowner would have some incentive to keep paying.  Suffice it to say that to fix this looming crisis the government must implement some type of loan modification program that will work on a massive, widespread level.  Absent that, our country is headed down a path of “stop paying, file bankruptcy, defend the foreclosure, and come out on the back end far better off.”

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