Loan Modifications, Foreclosures and Strong Medicine

Two stories tell different sides of the US housing crisis. In Philadelphia, a struggling homeowner tells her story of a tortured loan modification nightmare: at one point it appears she is to be forced from her home because her payment was short thirty-five cents. With no accountability and no predictability, banks who offer loan modification programs seem to hide in a black box.  Every time Lisa Fiorilli called for information about her loan modification, “she got a different answer.” Bank of America representatives deny that her trial modification was terminated because she was a quarter and a dime short but let’s face it: mortgage lenders lack both the philosophy and the infrastructure to effectively modify home loans. The result is that few homeowners are enjoying any real relief, yet the national loan modification nightmare continues.

On the other hand, many states like Nevada and California are taking significant steps to make it harder for banks to foreclose. Nevada’s passage of Assembly Bill 284 in 2011 is seen as the reason for a severe decline in that state’s foreclosure rate. Certainly California’s elimination of “dual track” foreclosures – where lenders negotiate loan modifications while foreclosure proceedings continue – makes logical sense. How is a homeowner to reasonably plan for the future when the lender is communicating inconsistent messages at the same time? California’s new law, just signed by Governor Brown, also makes the smart move of requiring lenders to assign just one processor to a loan modification request. The frustrating runarounds Lisa Fiorilli reports are commonplace for most homeowners looking to modify their loans.

While loan modification programs seem inadequate at best, the efforts of state legislatures to slow down foreclosures don’t appear to be much better. According to a recent report from Reuters, anti-foreclosure laws may cause more harm than good: “A recent U.S. Federal Reserve study found that in states requiring a judicial review for foreclosure, delays associated with the process had no measurable long-term benefits and often prolonged the problems with the housing market.”

For its part, Congress has refused to amend the bankruptcy laws to allow the courts to modify home loans without a lender’s consent, an option that is unavailable to homeowners under present law. This refusal has certainly hurt our national recovery, preventing  bankruptcy courts – the one place where troubled homeowners are most likely to seek relief – from accomplishing real good in this part of our economy.

For now, in Philadelphia, Baltimore and around the country, neither banks, consumers nor Congress are willing to take “the stronger medicine that some have urged and lenders have fought, such as pushing banks to write down the principal on underwater loans. “ Until we come to grips with the twin truths that (1) banks cannot be relied upon to provide real relief to troubled loans and (2) stalling foreclosures through well-intentioned legislation simply delays the inevitable, a real national economic recovery is still very far away.


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