ARTICLES

FIGHTING FORECLOSURE

By Bruce M. Sattin, Esq.

The country is enduring a vast tide of mortgage foreclosures, the results of improvident lending, a collapsing real estate bubble, blindly optimistic purchasing decisions, mortgage fraud, rising levels of unemployment, large numbers of shaky subprime loans and just plain bad luck. The government response has been limited and, for the most part, futile. Federal efforts to date have relied upon voluntary participation by mortgage lenders, and it has been reported that the Hope Now program, intended to provide assistance to 400,000 homeowners (a small percentage of the total pending foreclosures) resulted in only 25 loans being successfully restructured. The newest program offered by the Obama administration is only mandatory for loans held by Fannie Mae and Freddie Mac (both government-sponsored agencies). Of the mortgage modifications lenders have reluctantly agreed to, fully 53% of the homeowners later fell back into default, since the "modifications" resulted in higher monthly payments as arrears were tacked onto the already too-high existing payments.

The big mortgage lenders have a litany of excuses for this situation, but most either have no motivation to restructure loans to avoid foreclosures or do not have the legal authority since the loans are part of mortgage pools that securitize various kinds of equity instruments. Efforts to permit the bankruptcy courts to modify mortgage loans (called "cram-downs"), which are now prohibited by the Bankruptcy Code, have been successfully thwarted by the banking industry so far, although bills are pending in Congress to change the law.

Loans held by smaller banks and local savings and loans are not falling into default in large numbers, and the homeowners who do have financial problems generally find their local banks to be receptive to realistic loan modifications. Individual homeowners who borrowed from the big players (Countrywide, Washington Mutual, etc.), however, are left without effective tools to negotiate with lenders (or, in most cases, the investors that acquired their mortgages from loan brokers). Obtaining a meaningful mortgage modification from these mortgage holders is nearly impossible, and getting approval for a "short sale" is not much easier. Even if homeowners can find buyers for their homes in this distressed real estate market, they find the convoluted procedures set up by the lenders to approve short sales difficult and burdensome to navigate, and approval times of 60 to 90 days result in lost interest from the rare buyers out there.

Homeowners facing foreclosure feel helpless and hopeless. Many just give up and move out, abandoning their homes to the lenders, or mailing the keys to them, a scenario so common that it has acquired the name "jingle mail" in the industry. There are better options. The foreclosure process in New Jersey takes ten months to a year, and with appropriate legal assistance, a homeowner can extend the process to 15 to 18 months by asserting a legitimate defense.

Delaying foreclosures does not come without consequences. The homeowner's credit score will drop dramatically, but the original mortgage default will have already caused that to occur. Some homeowners will not want to tolerate the constant stream of letters and court documents, and dunning telephone calls from the lenders' collection department are hard to stop. But for the homeowners willing to stand up to the lenders with the support and assistance of their attorneys, the payback can be worth the cost.