Lessons learned from the mortgage crisis
Pro Bono Publico
I moved to Glenwood in 2008 intent on establishing an estate planning and probate practice. If I were wedded to that objective, my timing was bad. I hadn’t been here a month when Bear Stearns collapsed, and the average 401(k) began an abrupt descent into 201(k) territory.
Under such economic conditions, hiring a lawyer to draft a will was on the bottom of many priority lists, so I spent several years doing something quite different and unexpected — troubled loan work for lending institutions. This work included loan sales, refinances and foreclosures.
Most of my foreclosure work focused on development and commercial property. We didn’t handle residential foreclosures or represent the national banks where most residential homeowners got their mortgage loans, so when my firm would get a call from a homeowner in foreclosure seeking legal advice in a desperate attempt to save the home, the receptionist would forward the call to me.
I would try to help, but knowing what I knew about the foreclosure process in Colorado, there was often little that could be done. I thought to myself on a number of occasions that I wish I had had the opportunity to counsel this person much earlier. In a few instances, I thought I could have assisted the homeowner in preventing the foreclosure. In others, I thought that I could have at least better prepared the homeowner for what to expect, so that when the foreclosure happened, it wouldn’t come as such a shock.
In any event, here are a few things I would have said had I had the opportunity to speak to a financially distressed homeowner early on. Perhaps this information will be helpful to homeowners who are still struggling financially and to others in preparing for the next economic recession.
First: Colorado has a law that basically provides that in order for a loan agreement (including agreements providing for principal or interest reduction or forbearance) to be legally binding, it must be reduced to writing and signed by both the borrower and the lender. This means that the oral statements of a lender or a loan servicer are generally unenforceable.
To me this is among the most important pieces of information for a financially distressed borrower to know and take to heart.
Getting some kind of mortgage relief from a national lender invariably starts with a phone call to the loan servicer and a lengthy underwriting process involving several follow-up phone calls.
Customer service agents working for loan servicers may have made oral promises (or what may have sounded to the homeowner like a promise) that a loan modification was approved or guaranteed. From a legal perspective, a loan agreement isn’t enforceable until it’s reduced to writing and signed by the lender. This means that until the ink is dry on the loan modification, the borrower should understand that the lender has reserved all rights, including the right to declare default or foreclose, even if a loan servicer gives oral indications to the contrary or a loan modification is seemingly in progress.
Second: The following is a basic, realistic summary of the distressed loan situation: (1) If a loan is performing (i.e., payments are current), a lender has little economic incentive to agree to some form of mortgage relief (i.e., principal or interest reduction, approval of a short sale). (2) If a borrower defaults, it may or may not make economic sense for the lender to provide mortgage relief. (3) It takes a lot of time and money to modify a loan, so if the financial condition of a distressed borrower is sufficiently poor (or not sufficiently good), the most reasonable course of action for the lender may be to foreclose the loan. (4) As a result of the foregoing, a fraction of financially distressed homeowners who enter into the loan modification process get some kind of relief. Others, and probably most, don’t and end up losing their home.
I encountered some borrowers who quit making payments in the hope (and with the mistaken expectation) that they were guaranteed a principal or interest reduction if they defaulted and applied for mortgage relief. Some of these borrowers ultimately failed to qualify for mortgage relief and ended up losing their homes.
When a borrower defaults on a loan, he or she loses a significant degree of power and control. The bank has economic interests to protect, and it may be subject to regulations that dictate its course of action. Meanwhile, from a legal perspective, when the borrower is in default, the law tends to favor the lender, who then has many rights under the loan agreement and under law.
All this is to say that the first and strongest line of defense for a borrower trying to save his or her home from foreclosure is to take every possible action to avoid defaulting on the loan in the first place.
If nothing can be done to avoid default, the borrower should pursue mortgage relief but should also adjust his or her expectations about the likelihood of losing the home and plan accordingly. This is undoubtedly an uncomfortable and unfortunate reality, but it is the reality nonetheless.
Third: Once the loan is in default and the foreclosure has started, it’s difficult from a practical perspective to justify stopping it. A lender will spend hundreds if not thousands of dollars in legal fees to prosecute a typical foreclosure. This does not take into account the overhead costs of managing troubled loans.
Meanwhile, under most circumstances, Colorado law requires that if a foreclosure is not completed within a year of the original date of the foreclosure sale, the lender will have to start over from the beginning to foreclose the loan, which is not something the lender will ordinarily allow. The decision by a lender to foreclose is somewhat of a Rubicon, meaning that it’s a difficult decision to go back on. Each passing day, it becomes more difficult from a practical perspective to stop the foreclosure process, even if simultaneous efforts are being made to modify the loan.
Fourth: In light of the foregoing, the most prudent course of action is to be conservative when getting a home loan and to try to be prepared for difficult economic times. When storm clouds start to form, be proactive: Understand that it will be easier to perform defensive maneuvers (i.e., refinance the loan, sell the house, get a cheaper car or reduce personal overhead, find a renter, or get authorization for a short sale) when the loan is not yet in default. Finally, if you cannot avoid default, work your hardest to get mortgage relief, but prepare yourself mentally to move on at the same time.
Matthew Trinidad is a transactional attorney in Glenwood Springs. He can be reached at (970) 945-2261 or firstname.lastname@example.org.
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