Over the past few weeks, I have read tons of rhetoric about robo-signors and gaps in the trail of mortgage assignments and even lost mortgage documents. This is not new news. These issues have existed on and off for the past 20+ years since creation of mortgage backed securities (MBS). As long as mortgages are bought and sold in the secondary market, there will be documentation gaps. These gaps will be addressed in due course by the servicing agents and the foreclosure process will fix itself within a reasonable period of time – either by legislative or judicial mandate, or both. This still does not address the heart of the mortgage crisis.
While the current focus is on the paper process, no one is mentioning a very simple concept upon which a foreclosure is initiated – A DEFAULT IS STILL A DEFAULT. I am afraid that some of my well-intentioned brethren who are bringing these issues to the forefront in the State Courts are simply finger pointing since there is yet no true structured mechanism to assist homeowners who can truly afford to retain their homes.
One of the first cases that crossed the newswires in the recent past was the case of the homeowner in Maine. While the background and story line would pull at anyone’s heartstrings, the bottom line was that the homeowner was in default, had no means of curing her mortgage default, either in or out of the courts, including bankruptcy court, and was attempting to take advantage of a series of errors caused by her lender’s incompetence to extend the inevitable. Unfortunately, our homeowner in Maine only has time on her side, and absent a miracle, will ultimately lose her home.
Now I am not an advocate for banks or the banking system. I have spent the last 22 years working for the little guy. I am also a former banker. I had the experience of working for a major bank in New York during the first real estate explosion and implosion in the mid-1980’s. I also saw first hand the development and implementation of the MBS.
One thing that rings clear is that the MBS has taken the word Bank out of mortgage banking. I can no longer name a single commercial bank (although I am certain that there are still some regional/local banks) that retains the majority of its mortgages “from cradle to grave.” This has made the mortgage business nothing more than a paper-pushing process. No one wants to take responsibility to help the distressed homeowners who actually have the means to remit timely mortgage payments to a lender and sincerely desire to rework their mortgages to save their homes.
Approximately 18 months ago, the Courts in New York mandated that a “Mortgage Settlement Conference” take place in most foreclosure proceedings. While again this effort should be applauded, it has proven not to put any real dent into assisting homeowners who have the ability to pay. The problem is that the banks are not “actively participating” in the process of assisting aggrieved homeowners. They are again simply pushing paper.
A typical example is the homeowner who receives a notice from the Court stating that they are to appear at a settlement conference. The homeowner prepares the documents requested in the notice and attends the settlement conference in the hope of meeting face to face with a bank representative. Unfortunately, a decision maker from the bank rarely if ever appears at these conferences. In the vast majority of cases, the conferences are adjourned multiple times and homeowner is directed to deliver the documents requested either to the bank’s attorney or directly to the bank. The documents then go into the “black hole” to be processed. The homeowner is left in the dark and is at the mercy of its mortgage holder until the mortgage holder comes bank with an answer.
This is where the current process is flawed. Banks forget that they are in the business of making money. They lend money to homeowners in the hope of being repaid with interest – their profit after costs of funds, etc. In addition most banks should want to turn non-performing loans into performing loans.
The easiest way of doing this is to immediately put any homeowner who wants to modify their mortgage into a trial modification based upon the 31% rule already implemented by most banks. This serves two important purposes. First, it culls out those who clearly cannot afford to retain their homes. By giving the bad news to a homeowner earlier in the process, it avoids the setting of false expectations and gives the homeowner the opportunity to seek other options including bankruptcy. Second, it forces the homeowner to “put their money where their mouth is” and begin to again remit monthly payments to their lender.
Let’s be honest. This is really financial triage – some will live and some will die. Those who can consistently remit timely payments to their lenders should be given every opportunity. In addition, even if the bank ultimately does not agree and denies an application for a modification, it does not worsen the homeowner’s position dramatically. I have seen countless situations in which homeowners are told by their lenders not to remit any mortgage payments until they are advised to do so. Countless months go by. Does the homeowner save any of the monies that could have been used for mortgage payments? Rarely. The bank then denies the modification after 6-8 months or more, and mortgage is now more than a year behind. Even though Chapter 13 bankruptcy is then the most viable option available, the homeowner now has to grapple with the dual conundrum of not only beginning to remit post petition mortgage payments but also dealing with a Chapter 13 plan payment which may now be out of their reach because of the magnitude of their mortgage arrears.
This is the precise process that was proposed over 18 months ago in Congress when efforts were undertaken to allow Bankruptcy Judges to modifying first mortgages in Chapter 13 Bankruptcy. In Chapter 13, a debtor is obligated under the terms of their plan to begin remitting both plan and post petition mortgage payments one month after the petition is filed. There is no waiting or grace period. This is the tradeoff that everyone misses about Chapter 13 bankruptcy. Chapter 13 bankruptcy in its simplest form boils down to three words: Pay To Play. As long as a debtor holds up his or her end of the bargain, their lenders must comply with the mandates of the law – period. It is essentially that simple. In this way, those homeowners who can truly afford to pay will obtain real financial relief, more homeowners will have the peace of mind knowing that they will be able to retain their homes, and hopefully, in turn, participate in getting the economy moving again.
