A Brief Look at Foreclosure

People purchase homes to succeed, not to fail.  People purchase homes in which to live and raise families, not to default on loans and have a bank kick them out into the street.

A bank is a source of money; it is not a source of comfort.  If you are looking for an entity with a heart, look toward your church, synagogue, mosque or a rich uncle.  A bank has no heart.

While lacking a heart, a bank has something that you do need – money.  It can be your money, someone else’s money, the government’s money or the bank’s money  When buying a house you need what the bank has, money.  In Maryland, here is how it generally works:

A bank lends you money to purchase the house.  You give the money to the seller in exchange for the seller giving you a deed to the property.  You sign a note, a promise to pay, to the bank.  The bank wants and deserves security for the note, and you pledge the house that you just bought to secure the note.  You do this in the form of a deed of trust.  That is, you hold title to your property for a precious second, and then give the title to someone else, a trustee, through the deed of trust.  See Buying a Home.  Specifically, you give the title to your home to some stranger to hold until you either pay off the loan, sell the loan (which is actually paying off the loan), default on the loan where the trustee can sell the property to pay off the note, or the bank releases the deed of trust.  In legal terms, a deed of trust is a trust with the possibility of reverter based upon a condition subsequent.  In English, if you pay your mortgage note on time until it is paid either through a sale or paid off (the condition subsequent) then the deed of trust is either canceled or satisfied, and title reverts back to you.

Think of the note as a check.  You write a check to John Doe for $1,000.00.  The check actually says, “pay to the order of” John Doe.  That means that John Doe can cash the check.   John Doe cannot say to his wife, Mary Doe, “go to the bank and cash this” because she is not John Doe.  John must indorse it.  John can simply sign “John Doe” with nothing else.  That means that anyone who has possession of the check can cash it, even if it is stolen.  I can say “for deposit only account 001”.  John Doe  can also sign “John Doe, pay to the order of Mary Doe.”  In that case, only Mary Doe can cash the check.  The same holds true with a mortgage note, not everyone can enforce the note.

Banks sell mortgage notes for profit.  Banks are in the business of making money, and the sale of the note is legal.  Just because a bank sells the note does not mean that you don’t owe the money.  It means that someone else has the right to collect the money.  The question is whether the new owner of the note has obtained the proper indorsements.  In fact, there are many times when the new owner does not have the right to enforce the note without first proving ownership of the note.[/vc_column_text][/vc_column]

In the early 1980’s Congress passed legislation that helped first-time homeowners and disadvantaged minorities.   In my opinion, this was good.  In practice, as used by the banks and lenders, this hurt many of the families that Congress intended to help.  In the early-two thousands, you could buy a home for no money down with bad credit.  The banks wanted to make more money and did so for the bank’s benefit, not to benefit the homeowner.

For example, let’s say that John and Mary Doe qualified for a home that they could not afford.  The mortgage broker would usually say “I know that you have bad credit.  Just buy the home, and in six months of on-time payments you can refinance.”  The banks pooled the loans and sold them to investors.  The housing market was on fire and prices were rapidly increasing.

In addition, banks were making so much money selling the loans they started to encourage people to borrow against the equity in their home.  Banks would encourage homeowners to dip into the equity in their home, life was good, enjoy life, values are going up.

Then the bubble burst.  The Great Recession started.  People lost their jobs.  Banks started to fail.  Homeowners were overextended and learned that it was not so easy to refinance.  When the bubble broke not only could the homeowners not refinance, but they could no longer afford the mortgage payment, nor could they even sell their homes.  There was a glut of people trying to sell their homes to avoid foreclosure, home prices fell, the banks stopped lending money, and the homeowners found themselves owing more than the property was worth.

Shortly after President Obama was sworn in as President, he announced his Making Home Affordable (“MHA”) program to help homeowners who were in danger of losing their homes.  MHA had two subdivisions, Home Affordable Mortgage Program (“HAMP”) and Home Affordable Refinance Program (“HARP”).

The HAMP program was simple in concept.  If the homeowner was either in foreclosure or in imminent danger of being foreclosed on, the homeowner could request a mortgage modification, but this was limited to servicers who participated in HAMP. Not all servicers participated.

The goal of the HAMP program was to reduce a homeowners’ monthly mortgage payment to thirty-one percent of the household gross monthly income. This was accomplished through a reduction of interest rate, length of the mortgage, forgiveness of a portion of the debt, or a combination of all three.  The servicer was supposed to calculate the net present value (NPV) of  modified payments over the course of the loan and compare that figure to the money that they would receive if the servicer went through with foreclosure.  If the servicer could make more money through foreclosure, then they could foreclose, but if the servicer could make more money through a modification, they had to modify.

HAMP helped a lot of people save their homes.  The program was modified over the course of its lifetime, but it no longer exists.  Servicers are still offering mortgage relief, but it is a whole new ballgame.  Today, homeowners must seek other ways to save their homes, but that is for another blog.

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