We Must Stop the Foreclosure Frenzy
The housing markets are flooded with bank-owned REOs causing depreciation across America. Despite the programs offered by Fannie Mae and Freddie Mac to homeowners, and the government's acquisition of "legacy assets" or "toxic assets," most borrowers facing difficulty will not qualify for help because of past delinquency problems, defined as being more than 30 days late within the last 12 months.
The problems facing our nation's economy will only get worse as current events are leading the housing market into new waves of foreclosures. As the recession continues, more individuals lose their jobs through downsizing and company closures, which only exacerbates the already poor real estate market. The recession and housing crisis has created a dangerous catch-22 where the housing market negatively affects the economy, and the economy, in turn, pulls the housing market down even further when suffering individuals cannot pay their mortgages and owe more on their houses than the current market value.
With every REO and foreclosed property, it becomes clearer that financial institutions are drowning in the surplus of property. To reverse this trend, it makes much more sense to offer loss mitigation to both the lender and the mortgage debtors.
If all other forms of loss mitigation have been exhausted and it is apparent that the bank will end up with the property as a REO, why not accept a Deed-in-Lieu of Foreclosure, but, with a slight twist. Allow the borrower to contractually lease the property from the financial institution with an option to purchase the property back at a predetermined time, perhaps in five to ten years. Both borrower and lender could profit, creating a win-win situation for both parties.
Lenders benefit by:
Eliminating the high cost of foreclosure.
Avoiding the inevitable loss of liquidating property in an already over-flooded marketplace.
Avoiding vandalism and depreciation of the property.
Avoiding realtor fees.
Eliminating a loss reserve held against the bank's regulatory requirements.
Having a performing asset via the monthly rent.
Eliminating the risk of bank insolvency and FDIC takeovers.
Helping to stop the foreclosure frenzy and contributing to the stabilization of the housing market.
Borrowers benefit by:
Avoiding the cost, time, and emotional stakes involved in vacating the family home.
Obtaining affordable housing via a reduced monthly lease.
Retaining the ability to purchase the home at a later date, and thereby, having a vested interest in keeping the property in good repair.
While the leasing might turn out to be a band-aid rather than a final solution, it would allow all parties involved to postpone the situation until everyone is in a better position. Patient banks would be able to either re-sell the home to its original owner, thereby recouping its profit, or it could sell the house later when the housing market has gained more ground. In a time where each foreclosure only furthers the housing market deterioration, the lease maybe an effective method of dealing with problematic loans, foreclosures and the growing REO inventory.
At a prearranged date, the financial institution could do one of two things:
Allow the borrower to purchase the property back from the financial institution or
Liquidate the property at a price perhaps greater than the original defaulted loan balance by waiting for better market conditions.
Either way, the cost and problems associated with an actual foreclosure is avoided.
Before taking this step, the lendor would still need to consider:
How much a reasonable lease payment would be given the cost of the mortgage and the precarious financial state of the borrower.
How to enforce the lease.
When and how the borrower could repurchase the property.
How to handle property taxes and property repairs.
What type of insurance must be purchased for the property.
Deceptive Practice and Lenders Liability Warning
Loss mitigation is a viable alternative, but it is not without risk. In the case of Richter v. Bank of America, 939 F.2d 1176 (5th Cir. 1991), the lender entered into negotiations with Richter (the borrower) to grant financial assistance. During negotiations, the bank made statements such as "wanting to do the deal" with the borrower, the bank was "optimistic that {it} could reach an agreement," "we're headed in the right direction," and that "there were no deal breakers and they were going to bridge the gap pretty soon." The borrower claimed that they relied on these statements that everything would be all right despite the bank's repeated recital that it "could not make any promises."
After the property was foreclosed, the borrower filed a law suit claiming that the lender unfairly painted a promising picture of the situation. He felt that the lender had breached its duty of good faith/fair dealing.
The court awarded Richter with damages exceeding $3,000,000, finding that the bank had breached its obligation to deal in good faith. The court further cited that the bank had committed fraud and negotiation misrepresentation by teasing Richter with a proposed workout while pursuing foreclosure. This lawsuit should not stop any loss mitigation efforts but act only as a warning to lender's to be aware of liability issues.
A Pre-negotiation Agreement should be signed by the borrower before addressing any type of loss mitigation. The agreement should require the borrower to waive all possible defenses and emphasize foreclosure will only be stopped once an agreement has been reached.
This form of loss mitigation is a radical departure from the standard mortgage modification. The author and ICBA recommend that a qualified professional (attorney) be consulted before attempting a Deed-in-Lieu of Foreclosure or any other type of loss mitigation work.
Richard and Linda Bode have written two comprehensive training manuals BanKnology - The Fundamentals of Lending and Loss Mitigation which are available through the Banker Store on BankersOnline.com.
DISCLAIMER: The views expressed in this article are those of the author. They do not reflect the views of BankersOnline.com or its staff.
Copyright, Bankers Online. First published on BankersOnline.com 7/20/09
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