Posts Tagged ‘strategic default’

Should I Default on my Mortgage?

I get all sorts of comments on this blog, not to mention inquiries from prospective clients via email.  This one, which I’ll paraphrase, really caught my attention, as it presents a situation I suspect a lot of Florida homeowners are facing.  Here’s the question, and my response:

Question:  My wife and I have always paid our mortgage, but with the economy as it is we’ve struggled to do so recently.  Our house is about $150,000 underwater, and for the past year or so, we’ve borrowed money from my parents to make the mortgage payments.  Unfortunately, my parents can no longer afford to lend us any more money, so we’re trying to decide what to do. 

I’ve been asking the bank for a loan modification for many months.  They keep telling me “we’ll get back to you,” but then I never hear anything.  Most recently, the bank began insisting that my wife disclose her financial information as well.  I argued with them about this, since my wife wasn’t a borrower and did not sign the Note, but they insisted that the only way I would be considered for a loan modification was if my wife submitted her financial information as well. 

What should I do?  My wife doesn’t want to disclose anything, but if she doesn’t, and we don’t get a modification, then we can’t continue to keep making our mortgage payments for much longer. 

Answer:  First off, this might sound backwards to you, but I’m glad your parents are no longer giving/lending you money for your monthly mortgage payments.  I can understand the logic behind their doing so, don’t get me wrong, and I’m certainly not trying to criticize you or them.  However, as I’ve explained on many occasions, including here and here, depleting a 401(k), IRA, or savings account to make monthly mortgage payments on a house you just can’t afford is almost never a good idea. 

Please read this post, which I wrote in July, 2010.  As I explained there in detail, it’s almost never a good idea to deplete your savings to make monthly mortgage payments, as all that will happen is you’ll run out of savings and then still be facing foreclosure anyway.  If you realize you can’t afford to continue making monthly mortgage payments indefinitely into the future, isn’t it better to stop making those payments now, keep whatever money you have in your own pocket, and brace yourself for the impending foreclosure lawsuit, rather than spend all of your savings, then face foreclosure with no money left in your pocket? 

The fact that your parents were lending to you, as opposed to you depleting your own savings, doesn’t change my view.  In fact, it might make it worse.  Your parents are obviously older than you, so they’ll have fewer years in the work force (if any) to recover, and I suspect from your email that you’ve depleted your own savings, too.  Nonetheless, you’re still in the same situation you would have been in had you and your parents kept those monies in your own pockets – facing foreclosure. 

It’s critical for you, your parents, and all homeowners to realize that any money in your 401(k) or IRA can never be taken by the bank (i.e. to collect on a deficiency judgment) – the only way you’ll ever lose that money is if you take it out voluntarily.  Even if you get foreclosed, you’ll still get to keep your 401(k) and IRA monies.  Even if you have to file bankruptcy, you’ll still get to keep your 401(k) and IRA monies.  Hence, I can hardly imagine a circumstance where it makes sense to dip into these accounts to make mortgage payments.  I suppose a temporary reduction in income could justify doing so for a short period of time, but that’s the catch – lots of people think/hope their reduction in income is temporary, but before they know it, they’ve made a year of mortgage payments from their IRA or 401(k) with no end in sight. 

Obviously you can’t go back in time, and my point isn’t to beat you over the head with things you can’t change.  Rather, my point is to help you realize, going forward, that it’s probably best that you and your parents stop depleting your savings to make monthly payments on a mortgage you cannot afford. 

I can understand you thinking “let’s keep making the payments and try to get a modification … if we get a loan modification, and our monthly payment is reduced, then maybe we can afford to stay here.”  Candidly, LOTS of homeowners have that mindset, especially in Florida.  Unfortunately, as I’ve explained many times, including here, here, and here, loan modifications are rare, particularly those with principal reductions, and banks/servicers have all sorts of perverse financial incentives not to provide modifications to well-intentioned homeowners.  Hence, what you view as “temporarily borrowing until we get a modification” or “temporarily using savings until we get a modification” is more like “depleting savings waiting for a modification that’s probably never going to come.” 

As for the issue of whether you should disclose your wife’s finances, let’s put it this way.  I agree with you – it’s hard to see how the bank needs your wife’s finances to evaluate you for a modification, since she wasn’t on the loan in the first place.  In that sense, it seems logical to withhold this information.  However, if you’re adamant about getting a modification, and that’s what the bank is saying they need, it won’t help to withhold it.  Frankly, it doesn’t seem like you’re going to get the modification you want either way you proceed.  Hence, whether to disclose her finances is probably a matter of how you’ll feel if you get rejected again and didn’t disclose them.  Will it eat at you to feel like you didn’t do everything you could?  Will you feel better knowing you disclosed them, even if you get rejected, as you’ll at least know you did everything you could? 

I hate to see you in this situation.  However, nothing breaks my heart more than the conversations I’ve had with clients, particularly older clients, who tell me they’ve depleted all of their savings and are now being sued for foreclosure.  Please don’t make this mistake.  It’s bad enough to face foreclosure – it’s even worse to do so after you’ve spent all of your money.

Mark Stopa

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Free Foreclosure Seminar

Florida Law Firms Conducting Free Foreclosure Seminar

Mark Stopa and Matt Weidner to speak to Florida homeowners about foreclosure-related issues from a defense lawyer’s perspective on November 20, 2010 in Tampa.

Two prominent foreclosure attorneys, each of whom handle several hundred foreclosure lawsuits, are joining forces to put on a free foreclosure seminar for Florida homeowners.

Mark Stopa, Esq. of Stopa Law Firm and Matthew Weidner, Esq. of The Law Offices of Matthew Weidner, P.A. are conducting the free seminar on Saturday, November 20, 2010 at the Tampa Convention Center in Tampa, Florida. Mr. Stopa and Mr. Weidner intend to speak about a myriad of foreclosure-related topics, including loan modifications, strategic default, short sales, bankruptcy, and other “hot button” foreclosure issues.

Mr. Stopa, whose Stopa Law Firm is sponsoring the event, envisions the seminar as a way for Florida homeowners to learn about foreclosure-related issues from the perspective of a foreclosure defense attorney.

“There is so much misinformation out there,” said Mr. Stopa. “I’ve seen banks hold foreclosure seminars, and even some realtors, and I’m concerned that many Florida homeowners are unaware of the legal rights they enjoy or how the foreclosure process actually works.”

“It sounds hard to believe,” continued Mr. Stopa, “but banks are often the ones that cause this misinformation by actively misleading homeowners. Many homeowners think they can trust the banks, and they don’t retain counsel, so they don’t realize what’s actually going on until it’s too late.”

Mr. Weidner views the seminar as a way for homeowners to exchange stories, support each other, and seek widespread change in the foreclosure process. “The American people have become too passive in the foreclosure crisis,” said Mr. Weidner. “This seminar gives all of us a chance to ensure that our voices are heard.”

The seminar will begin in Ballroom “A” of the Tampa Convention Center at 11:00 a.m. on Saturday, November 20, 2010 and will proceed until late afternoon. Ballroom “A” seats 700 people, and it is anticipated that homeowners from all across Florida will attend.

Stopa Law Firm has offices in Tampa, Orlando, Jacksonville, and Ft. Lauderdale and currently handles several hundred foreclosure lawsuits throughout Florida. Stopa Law Firm can be reached at 888-450-1549 or

Matt Weidner handles several hundred foreclosure foreclosure lawsuits, primarily in the Tampa/St. Pete area. He can be reached at 727-894-3159 or

Mr. Stopa and Mr. Weidner both write a blog about foreclosure-related issues. Their blogs can be found on their respective websites.

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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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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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:


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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Strategic Default – the stigma is going away

According to a is recent study by the Chicago Tribune, half of all Americans deem it acceptable to stop paying a mortgage the homeowner can afford to pay, i.e. strategically default.  Clearly, the stigma with strategic foreclosure is going away.

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Strategic default – by the Mortgage Bankers Association

Mortgage Bankers Association Strategic Default
Apparently, what’s good for the goose is not good for the gander.  Or that’s what the MBA would have us believe, anyway.   

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The state of affairs, Strategic Default

I’ve read countless news articles in recent days, but this one really caught my attention.  To sum up the article: (1) banks still think they’re above the rest of us; (2) the foreclosure crisis isn’t over; (3) the moral obligation to pay one’s mortgage is decreasing, i.e. strategic default is becoming a more socially-accepted option; and (4) homeowners need to protect their families.  These two quotes jumped out at me:

“Do you think lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?”

“If you want to avoid foreclosure, you need to talk to a lawyer at the first sign of trouble.”

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Strategic default – on the rise

In recent weeks, I’ve seen a significant increase in inquiries from potential clients about strategic default.  I’ve blogged about the pros and cons of this in detail, below, but here’s the short version – many homeowners are tired of paying their mortgages when similar houses in the neighborhood are selling for one-third of they owe.  A lot of people just don’t see the benefit of paying $200,000 on a mortgage for a house worth $75,000. 

Apparently, the increase in strategic defaults is not limited to my practice, as numerous media outlets are reporting the same thing (throughout the country):

These articles seem to suggest that as many as one-third of all foreclosures are “strategic” in nature.  Apparently, the stigma of going into foreclosure is lessening with each passing day.

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Foreclosure statistics – WHY? (More proof that banks are harming the economy)

A recent article on Yahoo shows that banks foreclosed on 95,364 properties in August, 2010.  Think about that for a moment.  In one month alone, nearly 100,000 homes were foreclosed.  Whenever I see statistics like this, my immediate reaction is to wonder “Why?  What is this accomplishing?” 

Some judges, including Palm Beach County Chief Judge Peter LeBlanc, have tried to justify the increasing number of foreclosure judgments (and the use of foreclosure “rocket dockets” and the use of senior judges) by arguing “it is important to clear the foreclosure cases so that vacant and dilapidated homes can go back on the market, presumably increasing neighborhood property values.”  When I saw this quote from Judge LeBlanc, I blogged about it, below, arguing that banks are harming the economy, not my clients, because banks cause homes to be vacant and abandoned, not homeowners.  If you read today’s Yahoo article closely, you’ll see what I mean.  After all, as Yahoo reports:

“Fewer than one-third of homes repossessed by lenders are on the market”

Ponder that for a minute.  Foreclosures are on the rise, at never-before-seen rates … yet the homes that banks are foreclosing are not being listed for sale.  What does that mean?  Simple –

Banks are causing homes to be vacant and abandoned.

That may sound harsh, but there is no other explanation.  To illustrate, if 95,000(+) homes were foreclosed in August, and banks are listing only 1/3 of those properties for sale, then 60,000 homes that were foreclosed in August are now vacant/abandoned. 

There is no other conclusion that can be drawn here.  The numbers don’t lie.  Banks are causing homes to be vacant and abandoned.  Every time another foreclosure judgment is pushed through, another homeowner is removed from his/her home, causing the home to sit, empty. 

This is what lawyers such as myself and fellow foreclosure defense attorney Matt Weidner have been saying for a long time. 

Why are Florida courts in such a rush to foreclose on homeowners? 

There simply aren’t enough buyers for all of these properties that banks are foreclosing upon, so all that’s happening when courts “push through” foreclosure cases is that homes which were occupied become vacant.  Instead of a family having a place to live, a bank adds another property to its inventory (and that property sits, unoccupied). 

Respectfully, I dare anyone to explain how this helps our economy. 

How does it help for homeowners to be removed from their homes so those homes can sit, idle, unoccupied, not even listed for sale?

How does it help for tens of thousands of homes to become vacant every month? 

I urge judges to ponder these questions when they are asked to sign a foreclosure judgment.  Ask yourself, judges, “am I really helping the economy?”  “Who is being helped here?”  If you don’t think that matters, remember – mortgage foreclosure cases sound in equity.

Where is the equity in foreclosing on another homeowner when that home will sit, unoccupied, without being sold, for months or years? 

I fear that some judges, in their ongoing urge to “clear the backlog” of foreclosure cases from their dockets, are not going to be persuaded by this argument.  If so, then please, at least spare us the argument that Chief Judge LeBlanc made when he told the media that “it is important to clear the foreclosure cases so that vacant and dilapidated homes can go back on the market.”  Respectfully, at this point, we all know that’s simply not true.  In other words, let’s call a spade a spade.  

The only thing foreclosures are accomplishing is filling the bank accounts of fat cat bankers, who are accumulating homes at record rates and waiting to sell those homes so as to maximize their own profits. 

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