Hard Truths Block Solutions to Foreclosure Crisis – But, I have the answers that will fix it.
We need to begin this journey by making sure we have a common understanding of why we are, where we are today, so I’m going to start out by stating what I see as being the absolute facts of our collective situation related to the foreclosure crisis, being individually at risk of foreclosure, or representing a homeowner at risk of foreclosure.
After that, I’ll put it all together so you can clearly see the thinking behind what I propose to be the path to a real solution to the foreclosure crisis. So, if you want straight answers… the hard truth… pertaining to this mess… read on.
This is an analysis drawn from my experience interacting with homeowners… over the last three years, during which time, I’ve heard from and spoken at length with many hundreds… certainly tens of thousands through email, and from all walks of life, from all over the country.
I also talk with any number of foreclosure defense and bankruptcy lawyers every day, and it should go without saying that I read more than my share of everything related to the economic crisis in which we remain entirely mired, with no end in sight.
Here’s what’s really going on:
1. Homeowners at risk of foreclosure wanted their loans modified as they had been told could be done by the President of the United States, when introducing the Making Home Affordable program in the latter part of February 2009.
2. It didn’t go well for millions of homeowners, and not just because they lost their homes after being told their modification was “in progress,” but because overall, their servicers treated them with nothing short of utter contempt, with an appalling lack of professionalism, and with total disregard at a level usually reserved for insects found indoors. (Was that too subtle? Hope I wasn’t being to easy on them there.)
3. Homeowners first became frustrated, then angry, then desperate… and then, represented by legal counsel. The lawyers started looking closely at everything having to do with the mortgages, their associated notes and related assignments, endorsements, documents, and anything even potentially relevant. And they found that there were in fact big problems with how foreclosures were being conducted.
4. The idea that the banks were foreclosing illegally and/or improperly, and that they could potentially not even own the loans in question, spread like wild fire. Maybe the bank couldn’t take their homes after all. And the homeowners headed to court for on-the-job training to become lawyers, ready to do battle with the likes of Bank of America. Every encouraging decision started passing from blog to blog within hours of being available, and the bad decisions made for bad days.
5. Today, some hire lawyers to plead their cases, but many others are homeowners-turned-pro-se-litigants and they know more legal and securitization terminology than could have ever been imagined would ever be the case. They learn more each day as they prepare for their days in court. They walk around with their file folders filled with the legal paperwork that they hope will persuade a judge that their servicer has no right to foreclose, making the case that they lack legal standing because the securitization of their loans was improper, illegal, fraudulent, inadequate or should have otherwise not have been allowed.
BUT… the odds are that they won’t win their lawsuits, their legal arguments will not prevail and ultimately they will lose their homes to foreclosure. Many arrive in court having not made a mortgage payment in several years, and entirely unable to make up the amounts in arrears, which now include late fees and charges that have added significantly to their balance.
Even the most experienced foreclosure defense attorneys who continue to argue with increasing skill that the securitization of mortgages should preclude foreclosure, find that judges are more interested in the fact that their clients haven’t made their mortgage payments… and the foreclosures march on, and on, and on.
The arguments about title and improper assignment of notes being made by lawyers and pro se litigants may in fact be right, at this point there’s no question that Wall Street and commercial mortgage bankers screwed things up big time. They failed to comply with numerous laws governing the transfer of real property, failed to comply with the applicable articles of the Uniform Commercial Code or the rules set forth in Pooling and Servicing Agreements, and they attempted to correct these improper acts by creating fraudulent documents and robo-signed affidavits.
As incredible as it may sound, in many cases the party foreclosing cannot establish that the trust they say owns the loan, in fact, does legally own the loan.
And yet, even in such instances, judges allow the foreclosures to go forward and homeowners lose homes under such circumstances every day. Not always perhaps… but in the vast majority of cases.
At least in part, it’s a question of monetary damages. How was a homeowner damaged because their note was not properly negotiated into a REMIC securitized trust? The homeowner wanted a home loan, the bank made that loan, and the homeowner signed the promissory note and got the home or loan they wanted.
Then the bank sold that loan through the process of securitization… and they handled various aspects of that process so badly that many trusts don’t even know and therefore cannot prove which loans they are holding or supposed to hold. And truth be told, in many cases, as a matter of law, they don’t own any loans at all. Investors who thought they were investing in mortgage-backed securities, actually invested in nothing-backed securities.
But, the question for the judge hearing such a case brought by a delinquent homeowner is… how were homeowners damaged by the inadequacies of the securitization process? The answer is, and let’s be honest about this… they weren’t. A homeowner was not prejudiced by the fact that the bank did things wrong as far as the securitization process is concerned. And homeowners wouldn’t care about any of this… had their bank just modified their loan as they requested in the first place.
They’re suing now, alleging that their loan is not owned by the trust foreclosing, among other things, but only because they couldn’t get their loan modified. They don’t want a free house… they just want a payment that will allow them to remain in their homes as they struggle to survive the worst recession in 70 years. And the judge knows that’s what this is all about too.
The judge’s perspective…
When a judge sees such a case come before him (or her), he has to ask himself what it is that he’s being asked to consider in terms of an outcome. It’s as if he asks the homeowner: What is it that you would want me to do, assuming I were to find in your favor?
The judge knows what the other side wants… they want to foreclose and repossess the home, but what do homeowners want to see happen should they win? Do they want their loans to be modified? Yes, but the judge has no power to force the loan’s modification, he or she cannot interfere with the terms of a private contract. Decisions to modify loans are discretionary and no law requires that such decisions be made. And, understanding that limitation, the judge is not going to wipe out the mortgage and award the homeowner a free house because absent financial damages incurred by the homeowner resulting from the inadequacies of securitization, that wouldn’t be equitable either.
The bank may have “un-clean hands,” because it failed to follow the rules and even broke several laws, but that didn’t directly damage the homeowner financially. Conversely, however, the homeowner is not appearing in court with “clean hands” either, as he or she is in default according to the terms of the contract he or she signed,
Just as the homeowner is claiming that the party seeking to foreclose lacks legal standing as a result of not being able to prove ownership of the underlying note, the homeowner lacks legal standing to enforce such violations of the law in the securitization process because the homeowner was not directly damaged financially by those violations. The investor may have been damaged by a note not being properly negotiated into a trust in which he or she invested, but the homeowner is not the damaged party, so the homeowner lacks legal standing as far as those legal issues are concerned.
Neither party is coming to court with “clean hands,” in legal parlance, but the homeowner is unquestionably in default of the terms of the contract he or she signed, and since the judge can’t rule that a loan must be modified, enforcing the contract’s default provisions is his only option. The only alternative outcome would effectively award the defaulting homeowner a free home, which would clearly not be an equitable remedy, because in the court of equity, you have to do good to get good, and as we’ve said… neither party is coming to court with clean hands, as far as the law is concerned.
To change this picture requires changing existing laws, and that takes time. Several states have already made some moves in that direction, but clearly such changes are not going to happen quickly, and we can only hope to see the benefit of such changes over years as opposed to months. And meanwhile, the foreclosure crisis continues.
Do you see the problem? I’m sure the homeowners reading this who are at risk of foreclosure do, but what about those reading this who are not struggling financially and are therefore able to stay current on their mortgage payments. Because “the problem” is yours too, regardless of you not being at risk of foreclosure.
To-date, America’s homeowners have suffered over $10 trillion in losses resulting from declining home prices, and since the number of foreclosures is continuing to increase, those losses are only going up. State budget deficits are growing as property tax revenues are declining, and communities are suffering from the impact of vacant homes increasingly lining the streets of middle class America. Homeowners underwater often stop making improvements to their homes, which lowers consumer spending and constrains our nation’s economic growth, and some start walking away as they realize that they will never break even on their real estate purchases.
Banks are also suffering from the costs of foreclosures and the ongoing decline in home prices. And investors, which include pension plans, are also realizing enormous losses each time another home stops producing a monthly payment. The fact is… the foreclosure crisis is destroying America’s middle class economy and we won’t see any significant economic recovery or expansion as long as foreclosures are growing in number each year and home values are falling, as is forecasted to be the case for the foreseeable future.
So, the fact is… no one is winning… we’re all losing as a result of the foreclosure crisis, whether you are personally at risk of foreclosure or not. We’re all in this together, and no one is getting out unscathed.
So, what do we do? We’ve already established that changing the picture today requires a change in our existing laws, which will take time. It shouldn’t come as a surprise that changes in existing laws would be required to address the situation we’re facing today, because we’ve never faced it before, and we simply don’t have laws on our books that adequately address situations that haven’t happened yet.
Meanwhile, however, while we wait for our legislative process to change our laws to better address our needs, our proverbial ship is sinking, and none of us can afford the costs we will face as we wait. We need to take some action now to mitigate the damage being caused by the foreclosure crisis. Our government understands this reality, which is why it continues to introduce programs designed to help in some way, but to-date every single one of these programs has failed to have any significant positive impact on the foreclosure crisis. Many have tried… all have failed and failed spectacularly.
The latest failures include the $2 billion program announced last year that was to provide financial assistance to those unemployed for extended periods. It was announced with great fanfare, and supposed to help 30,000 families remain in their homes. As it comes to a close later this month, Laurel Miller, Director of Homeownership for nonprofit Twin Cities Community Development was quoted as saying that “of the 250 people that applied for loans under the program, only THREE have qualified.” She also said that her four person staff is working 60 hours a week to process applications.
And if that’s’ not enough of a failure for you, this past week it was announced that the FHA Short Sale refinance program, which HUD officials initially proclaimed would help 3-4 million homeowners through 2012, to-date has helped… 304 homeowners. A year after the program intended to help 3-4 million was launched, and it’s helped 304. That’s not just a failure, that’s the launch of the Challenger space shuttle.
I could easily go on to list the numerous failures from both our state and federal governments as far as the foreclosure crisis goes, I’ve written about many of them on my blog over the last couple of years, but I don’t see the point in recapping them here. At this point, it doesn’t matter that they’ve failed or why they’ve failed, they’ve failed… and we should have all seen and heard enough about that.
Okay, so… what’s the answer? That’s what you’re waiting for me to present, right? That’s why you’ve read this far, that’s what matters. Because without an answer, you’d finish this article saying, “Great, so tell me something I don’t already know.”
First let me just say that any answer that relies on new legislation will take time, but that’s no reason not to begin and support such a process, and I’ll get back to that point.
Meanwhile, we need to do something to mitigate the damage caused by foreclosures… and here’s what I propose be the plan we push state government to adopt immediately… I call it: Prevent the Preventable.
1. Prevent the Preventable – If a foreclosure is “preventable,” we should be preventing it. No one is benefiting from another foreclosure in this country, so it should be easy for all to agree that preventable foreclosures should be prevented.
2. Define “Preventable” – The definition of “preventable foreclosure” should be based on the Pooling and Servicing Agreement’s requirement that ALL DECISIONS made by the SERVICER must be made in the BEST INTERESTS of INVESTORS who own the loans. Therefore, it follows that a “preventable foreclosure” should be defined as:
A situation where the modification of the loan will make the investor more money than would the foreclosure, and the borrower can document their ability to afford the payments associated with the terms of that modification.
It’s IMPORTANT to REMEMBER that, although no law requires a loan to be modified, the Pooling and Servicing Agreement, which is the document governing the relationship between the servicer and the investor… does require servicers to make all decisions in the best financial interests of the investors.
3. How to Assess What is Preventable – The formula for assessing what is a preventable is a mathematical formula referred to as a Net Present Value calculation. It’s sometimes referred to as “the time value of money,” and it seeks to compare two financial outcomes in order to see which is preferable to the other. It can get somewhat complicated, and state programs could choose the components of the calculation used in their state. HAMP has its own NPV calculation, so I would suggest we start with that one as supposedly it is currently being used by the banks to determine which loans should be modified.
(NOTE: I already have the specific optimal software solution for this assessment, one that is already also used by financial institutions and hedge fund investors, and have presented it to the State of Hawaii, among others. It is already set up to handle exactly this type of assessment, in addition to the reporting requirement described just below.)
4. Transparent Reporting – The process of applying for a loan modification must be transparent, which means that homeowners receive a detailed, written report showing all of the calculations behind the assessment as to whether their situation is preventable. Now there will be a record showing that the servicer has made a decision regarding a loan that was not in the best financial interests of the investors when that’s the case. And making decisions not in the best interests of investors, places the servicer refusing to modify in violation of the Pooling and Servicing Agreement.
5. The Objectivity of Mediation – I understand that state mediation programs have only had moderate success to-date because as they’ve been implemented, only the bank has the ability to assess what is “preventable.” We need everyone to walk into mediation with an objective report that presents all of the numbers involved in determining whether the investor would make more money modifying the loan. The servicer can still refuse, but now at risk of the investor taking action as a result. In addition, if a state sees servicers choosing the less attractive path from an investor’s perspective it may cause that state’s legislature to take additional steps to block foreclosures.
6. How to Handle What is Not Preventable – Benefits of the “Soft Landing.” Losing a home to foreclosure as a result of the recession that began in 2007 is traumatic. But we must recognize that not all foreclosures are going to be assessed to be “preventable.” It’s obviously up to each state as to how these foreclosures are handled, but I propose “a soft landing” program be offered. Here’s how it might work:
If the foreclosure cannot be prevented, then the homeowner could continue living in the home for one year making a payment based on their income and the rental market, or 2% interest only. At the end of the year, assuming the home is in good condition, they would receive a cash-for-keys payment to help them with their scheduled move.
This type of program would make the pain of foreclosure less acute. It would generate cash flow for the investors that wouldn’t otherwise be possible. It would reduce the costs of repairing homes damaged by angry homeowners. And when you consider that the homes foreclosed today are not sold within a year anyway, it prevents the neighborhood from the growing numbers of vacant homes.
7. Outcomes and Measuring Success – As I’ve said, there is no law on the books today that can force the modification of a mortgage, the banks can still say no regardless of what anyone says or does. But, the approach I’m describing makes the process transparent so that when the bank does choose to make a decision not in the best interests of the investors, everyone knows about it… to the penny. And because it relies on the same type of software platform used by financial institutions and hedge funds to produce a report available to homeowners and court appointed mediators, measuring and reporting on the relative success of the program will be readily available in real time.
8. Costs to the Taxpayer – Essentially… none, with the exception of the state mediation program, and in some cases, state mediation programs are already in place. Regardless of the details, this program doesn’t cost anyone a dime, in fact, it makes investors more money than would be the case when foreclosing and it saves them money with its promise of a smoother process and fewer repairs.
9. Ease of Implementation – It’s simple and fast. Assuming the state had a mediation program in place, and the last time I checked there were 14 that did, this program I’m describing could be operational in fewer than 90 days.
10. A Win-Win-Win Scenario – Everyone wins, except the servicer. The servicer wins by foreclosing because the servicer doesn’t own the loan. When a foreclosure occurs, the servicer gets to charge its extra fees and charges associated with foreclosure, while EVERYONE ELSE involved, the investor who owns the loan, the homeowner, other homeowners in the community, state and local governments, and our society as a whole, takes the loss.
Okay, that’s all for now… I realize that my readers can only absorb so much at one time. I’ve had several years to study and consider the myriad of issues related to the foreclosure crisis, and I’ve done so to the exclusion of all else. I need you to have read what I’ve proposed in this article carefully… so that you truly understand it from every angle. Feel free to write to me with questions, or to challenge my thinking.
And please understand… to the homeowners who are pro se litigants… or those who have retained qualified legal counsel… and even to those in bankruptcy, whose issues I’ve intentionally omitted in the interest of keeping this as short as possible… I AM NOT SUGGESTING THAT YOU GIVE UP.
Keep fighting any way you can. Keep applying for loan modifications and do whatever your servicer says to do as many times as they tell youj to do it. Then file OCC complaints, lawsuits, bankruptcy… anything that will keep you in your home, assuming that’s your goal. It won’t be easy, there will be many set backs and hopefully some good days as well. But understand that our courts do not hold the ultimate answer to our problems. And while you’re doing whatever you can to protect yourself, you also need to support the efforts that can help millions… you included.
Right now, it seems to me that everyone is out for themselves individually, and I assure you that won’t win the game for America’s homeowners. You have to do both, protect yourself individually, and also support the efforts intended to help all of us. United has always been the only way we stand.
Just today, I received several emails asking me to promote various planned demonstrations around the country, and several others from homeowners telling others to write to their state AGs demanding that they investigate the fraud in the chains of title… everything I’ve written about here. I hope everyone realizes that I understand what they’re saying and why they’re saying it. And I will support them any way I can, but the path they are on doesn’t lead to a real solution.
BUT WAIT… THERE’S MORE!
Coming Soon… Next, my new partner, Abigail Field and I will be announcing a newly formed political action committee and a proposal for a state legislative solution designed to end the foreclosure crisis AND solve the state budget deficits simultaneously… without any cost to taxpayers. We will announce the details in the next couple of weeks and I’m not allowed to share the details until then. It’s a legislative solution and as such will take time and money to promote to various state legislatures, although several have already asked to see it as soon as it’s ready, and we’re very excited about our prospects for success.
So, for now…
Mandelman out…
P.S. What you have just read is also a type of out line for the documentary I’m working hard to produce and release this calendar year. The documentary’s purpose is not just to entertain, it will change the way people think about the foreclosure crisis. Please help me produce the documentary by making a contribution. Just click below to donate via PayPal. Please help by supporting this effort, because we need to change public opinion, and it won’t happen using only the written word.
