A week or so ago I saw the headline “Foreclosure Fraud.” Being in the business, I was intrigued. I need to know what to look out for when conducting real estate closings, and I’m always interested in the latest scam that the criminal mind can perpetrate. You can imagine my disappointment when I read the article only to find out that a number of attorneys general and other politicians were grandstanding and propagandizing against the banks — AGAIN. I guess there are no real issues for November. Forget legitimate issues such as Health Care, the impending repeal of the Bush Tax Cuts or the Economy. They aim their guns at the banks. Why not? They’re an easy target.
Hey, I agree that banks own a majority of the responsibility for where we are today, but enough already. This latest concept being floated is that the banks are committing fraud by foreclosing on people improperly — and this is simply preposterous. Sure the service companies for the banks are overwhelmed, and folks in this country are having a tough time paying their mortgages (some mortgages that should neither have been granted nor received). Individuals over-extended themselves while the banks and Wall Street made money churning the loans then chopping them up (a topic for another day).
So here we are in the aftermath — also known as reality. Folks couldn’t afford the loans, so now they are defaulting and getting foreclosed upon. For most of us, this does not come as a surprise. Unemployment is up and home values are down. The banks, service companies and law firms that handle these files are overwhelmed. They need to hire more people — yes, but who wants to increase their overhead by hiring additional people to simply give away money and take more losses. Not a lot of business schools would promote this model.
As such, the banks and servicing companies are running on skeleton crews compared to the work flow. These so-called foreclosure mills are handling thousands of files per month. How can the process be more efficient? That is a good question. The answer for some servicing companies and law firms was the so-called “robo signer.” These are people signing off that the process was done properly on behalf of the bank/servicing company in states that require a bank agent to do so (so what about the states that don’t require these signatures? Pile on, why not?). They are signing documents prepared by their attorneys. Of course, when someone swears to have done something (such as reviewing documents), they should have done so.
By no means am I condoning perjury and/or misrepresentation. These people are being given documents by their attorneys who are controlling the process. Can they not rely on their attorneys? These are the folks that handled the proceeding, however certain state laws (not all, may I remind you – see piling on above) require that an “agent of the bank” sign off on it. This is known in all other industries as a “rubber stamp.” Here’s the true rub: I have yet to hear one report where a homeowner was foreclosed upon while still current with their mortgage payments. In fact, all of the lead plaintiffs in these cases have admitted to being in default and that they couldn’t afford their respective mortgage payments.
When will we reach the bottom of the housing market? Not anytime soon with these political stonewalls and grandstanding. Fannie Mae and Freddie Mac, the Government Sponsored Entities, who own a majority of the residential mortgages could lose billions of dollars by a delay due to these ridiculous and obstructionist lawsuits. The Wall Street Journal reported (10-14-10) that Fannie and Freddie could lose as much as $3 billion dollars if they are unable to foreclose on their loans for a period of just three months.
Guess who else loses? You and me: Mr. and Mrs. Taxpayer! Government Sponsored Entities. Can you say bailout? Tactics such as this are merely prolonging the inevitable. There needs to be a natural cleansing of the wrongs that occurred. There were wrongs committed by the banks and Wall Street, but there were also wrongs committed by a lot of these homeowners. Delaying is not the answer. We need to move on.
A SANE ALTERNATIVE
Now, I am sympathetic to the struggles of a homeowner in distress. My firm is dealing with these folks on a daily basis, and it’s sad. But what is happening now is not the answer. The best way to expeditiously get to the housing bottom with minimal collateral damage would be either through the short sale process or by realloan modifications. Currently, both procedures are flawed in many aspects (see banks not hiring people to help them lose money), however, for the overall economy they are the most productive.
A short sale is when the bank and the homeowner work together to terminate the mortgage by selling the home to another individual for less than what is owed. Think about it: one homeowner sells their home to another while occupying it right up until the closing. No abandoned homes; no abandoned neighborhoods. Although the seller in this case is also a defaulted borrower, he or she can hold their head up high and pass the keys to another without the shame of foreclosure. As for the loan modification process — well that is currently a joke. Banks are saying they are doing them, but they aren’t.
My recommendation would be to modify the loan to a reasonable principal amount based on the value of the home and the borrower’s ability to pay. Don’t forgive the balance, but rather take the balance of the principal that was knocked off and place it in a junior lien position guaranteed by the government (and involve the IRS, so that the debt follows them should they agree to participate). This gives the bank the security that some day the loan will be paid in full and allows the borrower to live another day by keeping their home and pride while they wait for the housing market to recover.
It may take a while, but it will eventually get there. We are all in this together therefore we should act like it.