Monday, November 15, 2010

The foreclosure crisis

As part of my law school training, I have to put together 'testimony' to a Connecticut legislative committee on the foreclosure crisis.
The more I read about the foreclosure crisis - the more ill I feel.

Law school professor Alan White reports that most mortgage modifications actually increased the costs to the homeowners seeking help.
They can't afford their mortgages in the first place.  Many who received modifications from large banks ended up in foreclosure again because the modifications did not lower the costs. (The exceptions were Goldman Sach's Litton Loan Servicing and Ocwen Financial -- kudos to them for recognizing and abiding by their obligations).

A congressional program intended to save 1 million homes by modifying 1 million mortgages ended up being used by only 25 homeowners. The banks had grafted on enough fine print to make the relief program unusable by almost every homeowner in the country.
The key players in all the damage are the lobbyists.
In its Feb. 12, 2009 issue, Businessweek reported that lobbyists made concerted efforts to thwart foreclosure relief legislation.  Recently, the New York Times has been reporting that the foreclosure companies rarely do the legal paperwork necessary for the foreclosures. A few have rushed through so much paperwork that they foreclosed on the wrong houses.  Homeowner rights have been completely ignored. Where were the legislators? The most they were willing to do was talk to the loan industry -- not actually regulate it.  The Constitution gives Congress the right to legislate mortgage modifications through the federal commerce clause and the contracts clause.  But we have not had any legislation with teeth. People continue to lose their homes.

Retiring senator Christopher Dodd, chair of the banking committee, initially made noise about restraining the mortgage loan abusers Business Week reported (Feb. 12, 2009). After receiving $5.9 million in 2007 and 2008 in contributions from the financial services industry, Dodd became very sympathetic to the mortgage loan industry.
Sometimes love can be bought.

I know someone dear to me who lost their home. They were happy to leave the craziness behind - a mortgage that doubled in payment amount - and a lender hostile to any modification unless it increased the total amount of the loan.   The homeowners are relieved to be rid of the burden -- one that forced them to spend every dime of income on their mortgage. They will probably never buy again -- despite having a high income.

The lobbyists that saved the foreclosure industry will have a lasting effect on America. They turned the American dream of home ownership into the American nightmare.  It will be interesting to see how things turn out 10 years from now. Will people permanently move away from buying?
How will we guard against the abuse of the foreclosure process?

If the federal government neglects to legislate against foreclosure fraud and abuse and refuses to legislate in favor reasonable mortgage modifications that bring total payments down, can the states step in to protect their own citizens?

No comments: