Great posts, Tom. So you are saying that in South Florida, say that a typical homeowner missed his first payment in September of 2009 that he would be looking at 3 months, say December 2009 until the case is referred, then one full year for proceedings, Dec 2010, and then a judge would set the sale date of July 2011? So, the homeowner lives in the house mortgage-free for 22 months, almost 2 years? The justice system sure does run slow.
Of course, you aren’t making guarantees, but am I to understand your current understanding of the timeline?
And to follow up, Tom, why are the banks so unwilling to modify?
For instance, let’s say I bought a home in 2004 at near the height of the market for $340,000. And say that some appraises it today for $175,000 and that we all agree that this is a good appraisal.
Now, the bank has two choices for a nonpaying note holder:
Foreclose, sell the house for $175,000 (whenever they can do that), and eat the loss
Modify the loan, but keep getting payments and share SOME of the loss with the homeowner.
I will admit that I know nothing about any of this except for what friends tell me who are behind, but option #2 is a no brainer. I know that the bank has $340k out there, but that value is gone. They won’t get that from anyone. Any ideas?
The judge, within the course of the legal proceeding, could certainly impose sanctions against the lawyers for “frivolous” filings, and the lawyers will likely go back to their client for reimbursement, since it was their fault.
Quite honestly, I’m not sure I agree that these were “deceitful” tactics. Sloppy, yes. Inaccurate (I’m taking the article at face value) - sure. But there’s nobody for the Plaintiff who would particularly benefit from misstating the amount due on this loan, so I assume it was a mistake. Similarly, documents (like payment plan proposals) may get printed and dated on one day, but sit in the mailroom for a few more, meaning they appear impossible to meet when they finally get mailed.
None of this is meant to say that the Bank didn’t do anything wrong; rather, I’m just suggesting that it wasn’t intentionally deceitful. Now, that doesn’t make it better. I have personal frustrations with Banks who send out “payment plan” settlement notices on the same day that we serve someone with the foreclosure lawsuit, which creates confusion. And it is also undoubtedly true that, as with any large corporate structure, it does happen that one instruction may conflict with another (I do hear “the left hand doesn’t know what the right hand is doing” often enough that it makes me twitchy).
But, again, there is a difference between these types of mistakes and being relieved of the entire debt. If, after buying your car, you wake up the next day with a dead battery, you are certainly entitled to a new battery, but not to a free car. If the judge did just render judgment in favor of the defendant, making the bank file a new lawsuit, he’s given the borrower more time in the house, and a renewed chance to try to settle (and, if the bank was smart, they might have taken this off their normal track and just renewed the payment offer, to save time and money). That’s a pretty big break, if we assume that they are indeed behind on their payment obligation.
That’s about right. That assumes an uncontested foreclosure, too. If the borrower hires a lawyer who engages in discovery, deposes bank reps, or otherwise files pleadings that the bank has to respond to (my job!), the timelines are even longer.
This is a crisis situation, and the judges in Miami-Dade are racking their brains to try to figure out how to handle it all. While they have it the worst among all Florida counties, the volume problem extends across the state. That’s why the Florida Supreme Court had instituted a task force to consider ways to improve the process - unfortunately, their idea was the mandatory mediation that I referenced earlier (and, although not uniformly imposed yet by Florida’s Supreme Court, is now standard in many counties). This, of course, doesn’t speed up the cases, or reduce the volume of work.
I’ll have to refer to my earlier posting about the ownership of the debt to try to offer a cogent explanation: Many people are indignant that their loan isn’t being restructured to the value of their property, which has invariably dropped. But the owners of these loans bought a debt on the secondary market, which just so happens to be guaranteed by a piece of property. Sure, the piece of property isn’t worth the debt it secures, but that’s true of my car, too, and I’m not entitled to a new car loan, either, just because my Saturn dropped in value as soon as I took it off the lot
Remember that this loan is generally owned by a Trust as one of many loans in a pool. By combining the loans, the Trust has a collective asset worth a given amount of money that collects a given interest rate. In theory (if you assume that property holds its value, and most mortgages are paid on time), this is a very safe investment, with a predictable return, so it’s easily sold as bonds to investors (and this begins a discussion that I am not an expert on, but which I sort of understand - loans were securitized pooled, and then large collectives like 401Ks and mutual funds invested into the pool).
Now, though, a certain percentage of the loans are in default, and the values of the properties ensuring the value of the pooled Trust have dropped. So, an investment that may have been worth $10 million, and produced an annual return of %5, is now only really worth $5 million and is only paying a return of 2%. From the bondholders perspective, this is a big problem.
Thus, they need to recoup the investment as best as they can. This begets a business calculation that I am not privy to, and don’t always comprehend. I say this because I’m not necessarily sure why the bank decides that foreclosing the loan is better than modifying, except to refer to the pressures to fulfill their obligations to the bond holders, and note that there are parameters which they’ve been given by which they can settle.
I don’t think that’s a great answer to your question, but it’s about as far as I get in terms of knowledge of these factors. I don’t want to give the impression that every loan is “smartly” reviewed - what might make sense on an individual level often does get overlooked when it becomes one of thousands being considered. If the owners of these loans were individuals (and not bondholders investing in a Trust), more reasonable decisions about loan modification might result. I would never counsel someone who is struggling to negotiate a loan mod that all decisions are being made with absolute care and consideration - I doubt that’s possible, and it is (in my ever so humble opinion) one of the problems with an economy populated by businesses “too big to fail”.
I suppose there may be another factor at play. Even in this bad economy, the overwhelming number of mortgages in existence are current, even as home prices have dropped. If you went into default, and the bank responded by rewriting your loan to reflect the value of the collateral, why wouldn’t everyone who is “upside down” do the same? I’m not exactly sure that this is part of the thinking process, but I could see a catastrophe if people started to voluntarily default to get a better deal (here again, this reflects a disconnect that people often have with their mortgage company - people who are starting to struggle will call in and state that they are not going to be able to make future payments, even though they are current. The Bank responds by stating that they won’t re-negotiate a loan that is current. So, the borrower goes into default, the claims that they were “told” to go into default by the bank to get a loan modification that they now don’t qualify for. Not exactly true, but I hear it very often).
I think the argument is, the banks have to impose onerous consequences, because if they compromise, it will open the flood gates for not only those who cannot pay, but those who would rather not pay and want to restructure their loan at a lower rate. That way lies ruin, so they have to make an example of the early few to avoid the following hoard.
But your point is valid; the banks are fooling themselves if they think they can avoid ruin.
I’m not Tom, but here’s another thought: while banks don’t really want to hold onto properties, loan modifications are basically one-way screwjobs for the bank without any corresponding hardship to the owner.
The price of the property will appreciate some day. To foist a refi onto a bank for the current depressed price, without any concessions on the part of the homeowner at the next profitable sale where the price would be presumably higher, is effectively screwing the bank at no cost to the homeowner (this assumes no provisions in the modification where profits are split or anything, I don’t know the exact details). Homeowner gets to stay in the house, gets a reduced mortgage, and gets the equity in the home sale. Basically, they get away with being a part of the housing crisis. Bank gets a loss on the loan, but doesn’t have to deal with the property. It’s not quite a wash, so I can see their reluctance - especially with properties in desirable neighborhoods that may not have been overpaid for too badly, but are nonetheless suffering extra-depressed prices because of the entire market.
This was actually one of my preferred requirements for an acceptance of government aid to keep people in their houses - the homeowner forfeits the cap gains exclusion when they sell their house in a more normal market. Homeowners should be required (again, they may be, i don’t know) to split their equity gain with the bank the next time they sell their house.
If you noticed, I specifically said I wasn’t talking about this situation.
My point was that you can’t say that all agreements between parties are “valid contracts” because there are several types of agreements that, in fact, society will not enforce.
I think that this is an excellent solution. Again, IANAL, but couldn’t the mortgage be written so that the loan is modified at the current market value. Then 5, 10, 15, or 50 years from now when the house is selling for more than the current value, the homeowner and the bank split the profits. Or the bank gets 75%, or 90%, or hell even 100%, as the homeowner gets to keep his home, gets far lesser payment amounts, and gets to build equity up to the market value as of today. (e.g. in my example, the homeowner could pay off his mortgage and have $175,000 of equity in the home, but when he dies 50 years from now, and his heirs sell the home for $700,000, the bank gets $525,000 and the heirs get the $175,000)
It’s not perfect, but something has to be done to pass the stalemate. My home value is being depressed simply because my neighborhood is going to hell. The house right next door to me has been unoccupied for a year and a half. Grass is waist-high, and the authorities don’t seem to do much about it.
I think it could probably be done. Nothing prevents me from signing a contract agreeing to a new mortgage at the price of my future sale profit. It probably has wrinkles in that it would disincentivize people to sell, but no matter, the operating principles here should be: ensuring people aren’t homeless, but also ensuring people don’t unduly benefit from this. (edit, actually no: not unduly benefit. rather, not benefit at all apart from having a roof over their heads)
If you walk ,they are stuck with a house. They have to pay to maintain it. To sell it they have to bring it to code . If they sell it they will get much less. They will get what the house is worth. Their profit would be hurt by the payment of many costs. If you keep paying they will get ,much much more. The original contract is not a reflection of the true value of the house. If they work with you, it can be a win/win. There is a motivation for them to be reasonable ,since playing hardball may be very expensive.
I agree with you 100%. It makes no sense for the banks to take such a hardball attitude, except for maybe like others have said, if they start giving into people who don’t pay, then that opens the floodgates for everyone to stop paying in the hopes that they get a modification.
But what I said was simply in response to the judge in this case throwing it out because the bank wouldn’t negotiate. I would contend that negotiation may solve some problems, but I have a right to say, “No, I want what is mine”
btw, How do the courts get away with ordering mediation? Isn’t the idea of mediation to see if the two parties can sit down and solve their differences without need of the court?
Well, one party or both doesn’t want that. They paid their filing fee, we have these giant fancy buildings in the middle of town with courtrooms in them, and the judge draws a salary to make these kinds of legal decisions.
It would be like if I took my car to the mechanic and paid him to fix my car, and then he keeps my money but tells me to go home and see if I can fix it myself, and if I can’t, then bring it back to him.