Foreclosure Buzz

In a recent decision, the Honorable Jeff Bohm of the United States Bankruptcy Court of the Southern District of Texas got right to the point:

Hard times generate scam artists. Particularly with respect to homesteads, these unscrupulous individuals prey upon the homeowners’ fears of losing their major asset: the house which gives shelter to their children. In both Cadengo [another case] and the suit at bar, certain unprincipled persons flimflammed honest, hard-working people who were desperate to keep their home and who trusted these individuals to help them achieve this objective.  When these scheming people eventually skipped town, they left the homeowners in harm’s way with their respective lenders breathing down their neck.  Unfortunately for the lenders, their own sloppiness and willingness to do business with scam artists leave them bearing the ultimate loss. It is the cost of doing business with unsavory individuals.

In re: THEODORE HARYDZAK, JR. and JO LANE HARYDZAK, Debtors. THEODORE HARYDZAK, JR. and JO LANE HARYDZAK, Plaintiffs, v. NEW HORIZON, LLC; 1211 KAPPA STREET TRUST; and FIRST BANK OF CONROE, N.A., Defendants, Case No. 08-30974-H4-13, Adversary No. 08-03061, UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, 2009 Bankr. LEXIS 2062, April 23, 2009.

It rarely happens, but sometimes a neutral third party with some power gets a peak into the willful disregard of the lending industry.  Of course this is one of the major reasons why the industry is so scared of giving bankruptcy judges any more power.   See Wallstreet Journal Editorial here (by a George Mason University professor).

Bankruptcy judges in particular understand lending better than most, and how it should be done.  They are used to seeing amortization schedules and loan documents.  They know a good loan from a bad loan, and they do not just do what the industry says.  When they oversee complex liquidations and reorganizations of entities like Lehman Bros, then looking at one mortgage loan is fairly simple.  So while the industry and regulators talk about making lending simple and easy with — you guessed it — better disclosures (article) – giving judges real power is the elephant in the room.  Rather than change ”unsavory” business models, the industry will merely offer better disclosures and some regulators and politicians will jump at the chance to declare victory.  We should not give it to them.

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Update: 3/4/10: HAMP is truly a failure after one year; moreover, lenders use its process to distract homeowners while they foreclose as fast as they can.  Article here.

——Original Post——

Five months ago, the Obama Administration released a program that was supposed to reach up to 3 to 4 million at-risk homeowners by providing mortgage servicers with incentives to offer loan modifications. We were skeptical (see article).  Today, the Treasury released its Servicer Performance Report through July 2009. The report shows that out of an estimated 2,705,302 eligible borrowers that are more than 60 days delinquent on their home loans, only 9% or 235,247 have even received trial modifications. When you add in the number of eligible borrowers that are less than 60 days delinquent, presumably, the number would be even lower. Add in the number that have received final modifications, and well…you get the idea.

So, why are servicers so reluctant to offer loan modifications? A recent New York Times article suggests that even when modification is best for the borrower and for whoever owns the loan, the potential to collect foreclosure-related fees may still provide servicers with enough of an incentive not to offer loan modifications. In other words, the ability to collect fees when a foreclosure occurs, when a late payment is made, or when force-placed insurance, appraisals, title searches or legal services are required may be more enticing than the fees collected for a modification.

While that is just one theory as to why modifications are not being offered, the numbers in the newly released report don’t lie. Loan modifications are happening at an abysmally low rate. Foreclosures march on, the economy remains in shambles, and servicers collect fees. Democrats are rattling the sabers — by talking about reviving the cramdown bill. Article.  Politicians talk, the industry does what it wants.  The more things change, the more they stay the same.

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