April 5, 2013 There has been a spike of questions about modifications, short sales and settlements with the banks. My unvarnished opinion is that all this activity is Public Relations and a substantive policy intended to increase rather than avert foreclosures. Quite the contrary, offers of modifications are excuses to drag more money out of borrowers, give them a “trial run” and then deny the modification. I will admit that there have been more modifications of late but they are few in comparison to the number of loans that should be modified, naming the creditor, the balance due, the terms of repayment and perfecting what is now an empty unperfected lien.
In the law we look to the intent to determine the intent. If a reasonable person would understand the consequences of their actions, it is deemed intentional despite all protestations to the contrary.
The result we see from bank policies and conduct is that people go into a declared “default” on a false loan because the bank representative who has no money in the game told them that the only way they can apply for relief is by being behind in their payments at least 90 days. Translation: We are advising you to breach your loan documents and go into debt on past due payments such that you won’t be able to reinstate.
People go into trial modifications on a false loan with a bank or entity with no authority to offer it during which they deplete their savings and retirement, go totally broke from paying the “offer of trial modification” thinking they are saving their home. Then they are told that the permanent modification was denied because of some obscure reason and they have a few days to reinstate the loan with money they don’t have and with a credit score that took a major hit because of the reporting by the same non-creditor who threatened them with foreclosure.
The objective is to wear people down financially, emotionally and physically. Turmoil in the household caused by the stress of impending foreclosure causes divorce, physical ailments and even suicides. The result is that the house goes into foreclosure despite the fact that the borrower made a perfectly valid offer of modification whose proceeds far exceed the proceeds from foreclosure.
The banks are like any other business searching for profit. So at first blush one might assume that anything they can do to mitigate their loss they would jump at, which is the way it always was until the whole “securitization” thing came along. What changed was that instead of having a risk of loss if the loan failed, the banks made tons of money betting on the failure. So as soon as mortgages were declared in default, they collected 100 cents on the dollar, insurance and the proceeds of hedges like credit default swaps. The irony here is that the banks collected the mitigation payments from insurance and credit default swaps while it was investors who were actually losing the money.
The payment from insurance and credit default swaps was triggered by a declaration from the Master Servicer that the value of the portfolio had decreased. This was not subject to challenge by the insurance company or the counterparty of the credit default swap contract. So in effect the loans were being sold multiple times. In the case of Bear Stearns, they were leveraged as much as 42 times. That means they were in a double bind position of taking fees for insuring portfolios that were sure to fail or at least sure to be declared as having failed, and they were getting money on their own insurance and credit default swap protections.
Translation: a loan that comes out of delinquency or declared default represents a huge liability for a bank that has already collected millions of dollars on a $200,000 loan. If everyone paid off their loan, the banks would owe back the money they received from insurance and credit default swaps. It isn’t the difference between the foreclosure proceeds and the offer of modification that motivates them, it is the difference between the millions they already received from insurers and counterparties and the nominal principal of the loan. And the only way they can be sure that they never have that liability to pay back millions of dollars on a loan they declared in default is by forcing it into foreclosure.
But the government and public are expecting the banks to act reasonably in the context of the old mortgages where the lenders had a risk of loss if the borrower didn’t pay. Now they have a risk of loss of the borrower does pay. Confusion over this had led the government, courts and borrowers to expect that the modification process would bring a stop to the tsunami of foreclosures, but as we have seen in recent weeks, the wave of foreclosures is coming again and millions of people are going to lose their homes to non-creditors who have already been paid multiple times for the “value” of the loan.
The only way out of this which has received some traction in the courts is to allege that contrary to the requirements of HAMP and HARP and other programs, the servicer and creditor did NOT “Consider” the modification proposal, which of course is an accurate portrayal of the the real world of loans that are subject to claims of securitization — even though those claims are probably false.
People who have made this challenge and who do so with professional help point out the obvious: that the proceeds from the modification are far better than the proceeds of a foreclosure. But the question is better for whom? If we take the real creditors, the investor lenders, the analysis is simple. They want the most money they can get. Since they were not included in the payment of insurance and credit de fault swaps, their only hope to mitigate their real loss is by real money from the homeowner which the homeowner is offering, based upon real documentation which is enforceable unlike the current fabricated, forged documents done without authority, right justification or excuse.
So the banks have an interest that is entirely adverse to that of the investors who were their clients. The banks want foreclosure so they can keep the insurance money and the investors want the loans reinstated so they can get their money back. This conflict of interest is so severe that the country is barely grinding through a recession that is entirely caused by the behavior of these banks who sucked the money out of the economy and are now holding it all over the world in tens of thousands of shell companies around the world.
The moral of the story is that if you are serious about modification or short-sale be prepared for a long journey where in the end your petition is denied and you must still litigate. For those who get the modification they want arising from the cover-up PR campaign of the banks, congratulations you are one in thousands who should have received the same benefit.