Having attended the Suffolk County Bar Association CLE lecture given by Charles Wallshein on “Suing the Loan Servicer for Mortgage Modification Abuses” and having practiced in the field over the years, I am suggesting a simple, yet practical solution to the mortgage foreclosure crisis.
Our court system is bogged down with hundreds if not thousands of foreclosure cases sitting in legal “limbo” as distressed homeowners remain in their homes until the day they are forced to relocate. Often this home represents an emotional tie. The separation anxiety combined with the comfort the home provides flies in the face of logic, resulting in homeowners, often with the aid of trained counsel, looking to remain in their homes for as long as possible. Other than ruining their credit scores, these homeowners should be “sacking” away every last cent for the day when they have to move. Based on this inevitable relocation, the strategy employed is simple: delay, delay and delay. Sometimes this strategy is aided by the Mortgagee (Lender) ceremoniously asking for a laundry list of documents throughout the settlement conference stage only to have the documents go “stale” months after submission or by offering a last minute modification that the homeowner cannot afford.
The foreclosure crisis has contributed to urban legends of homeowners remaining for years in their homes and of substantial principal reduction that can sway even the most credit conscious homeowner into voluntary default. After all, the Lender is not willing to speak with the homeowner who is current. Why not sacrifice some credit for five years of not paying a mortgage? Financially it is a “no brainer.”
The cause of the crisis is not important; the solution is. I have read countless articles written by scholars analyzing the cause of the problem, but never a solution. Attorney General Eric Schneiderman touts his multi-million dollar settlements. Why not use this money to fashion a practical solution?
Lenders are frustrated, the courts are log jammed and homeowners are suffering. The overwhelming majority of those homeowners presented a legitimate hardship (i.e., loss of job, spouse died, etc.,) which had thrust them into their current fate, but who desire to remain in their homes. These homeowners were intent on getting back on their feet and resuming their mortgage payments. Opposite are homeowners who are looking to “take advantage” of the situation and intent on not paying a dime despite having income.
Here is where the solution begins. First, there has to be a given time frame, perhaps six months of arrears before the homeowner is “summoned” into the legal system. It can be as simple as a summons with notice of default and can take place at the local District Court locations.
The Summons will mandate a Settlement conference at which time a series of questions are asked of the homeowner (and any other contributing household members) regarding household finances with the Mortgagee (Lender) having an underwriter available to “qualify” the homeowner for a temporary “new” mortgage payment. Similar to a “trial modification” this will allow the homeowner to start making regular payments, again, to “re establish” credit while reducing mounting arrears.
Utilizing qualifying ratios similar to those used in a mortgage approval, a temporary payment is calculated. This scenario can be subject to annual review so long as the homeowner continues to make the “new” payment. Ideally, the payment would increase annually as income in the household rises but this would replace the “trial modification.”
At some fixed point in time, say three years, if the homeowner makes the regular payments, a permanent Modification can be structured with a “streamline” recasting of the old mortgage. Incentivized principal reduction can be offered and the Mortgagee can either write off the principal forgiven or make application to a fund (AG Schneiderman’s settlement funds) for a supplemental payment towards the forgiven debt. By using ratios whereby Principal, Interest, Taxes and Insurance (PITI) represent between 30 and 35 percent of the gross household income, the goal of commencing affordable payments can be attained and much quicker than under the conventional Modification application. This is a simple mathematical calculation, which can be done easily.
This arrangement will allow homeowners to remain “status quo” until a more lasting solution is negotiated while re-establishing both their credit and self worth, and at worst can last through the end of any applicable school year. What with any luck, the market will rebound and that homeowner can rebuild equity.
For those homeowners who have NO income or care not to disclose their income, remaining in the home is NOT an option. It is this group of people who can best be directed to counseling and who can be offered alternatives. Keys for cash, deed in lieu, short sales and other relocation aid will still be available.
It is those who cannot accept the relocation who bog down the system. Given the homeowner is often not paying insurance or taxes, their monthly nut is greatly reduced. Can a rental be found to accommodate the homeowner with less monthly carrying charges? If the lender is going to offer relocation money, then perhaps it should be directly paid to the new landlord in an effort to hasten the relocation.
This option may be complicated by title issues affecting the property, but as part of this incentive the homeowner would “cooperate” in the foreclosure process so that the Mortgagee can minimize financial exposure. A prolonged foreclosure only costs more in insurance, taxes and maintenance so give the homeowner the money as an incentive to relocate or surrender title. In this scenario, title is more easily acquired (surrendered or through foreclosure) by the Mortgagee and the property marketed for resale. Whether municipalities would like to get these properties for their “lottery” to deserving home buyers is another aspect of the solution that can be developed.
This streamline approach is designed to separate those families with income from those without, as the key factor in this solution is the ability to pay something.
Irwin S. Izen is a real estate attorney in Commack, New York.