Many economists believe that the Great Recession of 2009 and 2010 was caused by the real estate crash that caused many home values to drop dramatically. For most of the early 2000’s mortgage money was fairly easy to come by home prices skyrocketed because more and more people took out mortgage loans – often beyond their ability to pay.
When prices crashed, many homeowners found themselves owing tens of thousands of dollars more than their homes were worth. This “negative equity” coupled with job losses and reduced household incomes has left many hardworking families facing foreclosure and little incentive to try to save their homes.
Over the past few years, mortgage companies have been on the hot seat about not following proper procedures (the robo-signing scandal) and because they have been so uncooperative in negotiating work-outs with borrowers.
In 2009, several members of Congress proposed legislation that would have given bankruptcy judge the power to rewrite mortgages. Under these proposed laws, bankruptcy judges could reduce principal balances to an amount equal to the value of the home and could reduce monthly mortgage obligations. Lobbyists for the mortgage industry went into overdrive to fight this, and they ultimately did not pass into law.
Mortgage Negotiation: Dead on Arrival
During the debates in Congress about the nation’s mortgage crisis, presidents of several large mortgage lenders appeared solemnly before Congress to promise that they really would make an effort this time. The federal government also created a modification program called the HAMP Program that provided guidelines for mortgage lenders to follow in modifying loans, while retaining certain federal guarantees. Georgia foreclosure law has been updated to add a requirement that all foreclosure notices must contain the contact information for a human being who has the authority to modify your loan.
Even now, you can see television commercials from lenders talking about all the people they have helped.
The truth of the matter is that mortgage lenders have not and will not take any voluntary action to help borrowers. Part of the reason has to do with the nature of the mortgage resale market in the United States. You are probably familiar with the idea that your mortgage will be bought and sold several times during the life of the loan. This is because mortgages are bundled together by the originators and sold to investors. Investment bankers discovered that they could earn more money if they broke the bundles of mortgages into pieces and sold the pieces as separate investments. Thus, while you make your payment to a mortgage servicer, the actual mortgage may be in 30 different investment packages.
Because no one entity owns your mortgage, there is no one who has authority to modify your particular loan. It is logistically impossible for 30 different investment managers to secure permission from their particular investors to change the terms of your particular loan, which may be bundled with pieces of 200 or 300 other mortgages.
Mortgage servicers (the company that accepts the payments and handles the bookkeeping) may have a little authority to negotiate, but usually not enough to make a substantial difference to you. There have also been a few underused government programs that allow for modifications (and presumably protect the servicer from liability) but very few people have been helped with these. Even the multi-billion dollar mortgage settlement of 2012 may be undercut if Congress refuses to renew the Mortgage Forgiveness Debt Relief Act of 2007, which is scheduled to expire on December 31, 2012.
No Reason Not to Try
Although your prospects for a meaningful modification are not great, there is no reason not to try. It has been our firm’s experience that the mortgage industry has not been willing to negotiate in good faith. Statistically very few mortgages have been modified nationally and our clients report very little success in this type of negotiation.
Our clients advise us:
- that lenders ask for the same documentation over and over and delay making any decision
- that lenders will start the foreclosure process and promise to consider a “stop foreclosure” proposal, only to deny the deal a day or two before the actual foreclosure sale
- in the few cases where deals are proposed the terms are very restrictive and offer little benefit to the homeowner
- a week or less prior to the foreclosure date they advise you that you do not qualify.
If you do choose to pursue the negotiation path, set a “drop dead” date after which you will move on to Plan B – bankruptcy or something else. This drop dead dead should be at least 3 weeks prior to the foreclosure date so you will have time to pursue Plan B. Chapter 13 will stop a foreclosure but you do not want to find yourself scrambling to gather the information you need to start your Chapter, or worse, to struggle to get your credit counseling certificate.
Do Non Bankruptcy Options Really Work?
My firm’s experience has been that lenders and/or their attorneys rarely agree to a voluntary cancellation of the foreclosure process. However, if you can identify a flaw in the foreclosure process (i.e. notice was sent to the wrong place or you have a written forbearance in hand that the foreclosing lawyer did not know about), you may be able to convince the foreclosing attorney to delay the process.
Similarly the Superior Court remedy is rarely used in residential foreclosures. First, you need to have evidence that the foreclosure is somehow wrongful, second, you need to be able to get into court prior to the foreclosure date, and third, you will likely have to pay a real estate litigator by the hour to represent you. Further there is no guarantee that the judge will agree with your position or that he will rule in time to order the lender to stop.
Georgia is a “non-judicial” foreclosure state which means that lenders do not have to file suit in a state court to proceed with foreclosure. Included in that stack of paperwork you signed at closing was something called a power of sale which authorizes the lender to sell your home on the courthouse steps if you become delinquent with your payments.
Foreclosure in Georgia can happen in less than 40 days start to finish – thus as a practical matter once you find out that you are actually in a foreclosure there is almost no time to do anything about it other than to file a bankruptcy.