Fallen through financial cracks in wake of the great meltdown
The housing market is definitely recovering, both nationally and regionally. Almost all of the problem banks have been shut down, merged or are emerging from regulatory agreements and getting back on their feet.
But depressions, recessions and crashes are like wars: the casualties can proliferate for years.
There’s a sub-class that’s fallen through the financial cracks in the wake of the great meltdown, and they’re probably fated to stay there; there’s no Dodd-Frank clause or Consumer Financial Protection Bureau reg that will come to their aid.
The federal government, in response to perceived and actual lender abuses in the early years of the century, has instituted a plethora of consumer protection rules that make a residential mortgage loan virtually the most complexly documented transaction on earth.
Other branches of that same government have laid down draconian rules for banks relating to the administration of defaulted loans. In both instances, banks comply, because they have to.
Financial institutions, especially community banks, have done an outstanding job of marketing themselves as entities involved in their trade areas, with the best interests of all the people, and especially customers, at heart. They’re so good at it that folks tend to believe that profit is just incidental to the bank, forgetting that banks and thrifts are compelled to be more hard-nosed than almost any other business.
Those borrowers that are disappearing through that crack between the CFPB and the FDIC examiner are generally small business people who have no advocate, and can’t afford one.
Often, they secured short-term loans on business properties, or possibly a building site, on which they intended to build a home or business, through a short-term loan with a balloon payment.
When these loans were made, the banks’ employees did exactly what they were trained to do: They assured the borrowers that they “were good customers, and there will be no problem rolling the loan over when it comes due.” The loan officers making these promises believed them and meant them. They were generally as ignorant of the true dynamics of money lending as the customers.
But when these loans did come due, and property values had dropped precipitously, the banks couldn’t renew the loan, even if they wanted to; they would have been making a very bad loan that the regulators would have required them to write off.
Many borrowers caught in this crack are so-called “Salt of the earth people.” They take their obligations seriously. Often they struggled to keep the loan interest current after maturity, and to negotiate some kind of work-out plan, generally to no avail. The bank would figure that it’s going to take a loss anyway so it might as well foreclose, go for a deficiency judgment, and move on.
That deficiency can be a killer. The lender, after getting title, sells it at the current market value, dramatically below the original value and well below the outstanding loan amount. The difference is still owed by the borrower, and if not paid, can be represented by a judgment entered against the borrower.
In this instance, the borrower has little recourse. The loan documents are very clear as to the consequences of nonpayment, and even if a borrower might have a case, for instance by establishing that the bank itself defaulted on commitments that then resulted in the borrower’s current position, the borrower doesn’t have the money to make that case. They can’t scare up several thousand to hire a lawyer.
So, these people end up losing a lot, up to and including everything, and there’s no cavalry to ride to the rescue. Not the CFPB, not the FDIC, not HUD, and not the legal community.
And here’s the final irony. Since the bank has turned the matter over to its legal counsel, the borrower has to speak to, and negotiate with that counsel, at $250 to $350 per hour, which is charged right back to the borrower in any ultimate settlement.
If anybody reading this is in this situation, contact me. No, I can’t help, but I do have a file of lawyer and banker jokes, many of which can’t be printed in a family newspaper.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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