Under a New York state law passed in 2008, banks and mortgage services must meet with subprime mortgage holders in a "settlement conference" before a foreclosure case goes to trial. The goal is for lenders and borrowers to come up with an equitable way to keep people in their homes without breaking the bank.
It almost never works. Of the nearly 800 such conferences reviewed by the non-for-profit Center for New York City Neighborhoods, only 3 percent resulted in a settlement (The full report is available here.)
The main difficulty, as in so many other aspects of the foreclosure crisis, lies in working with the loan servicing units of the lenders. In spite of the law's explicit obligation that attorneys for the lenders attend conferences with appropriate documentation and authorization to negotiate, lenders frequently send attorneys who know little about the case, have little or no documentation pertaining to its history or status, and lack authority to reach a deal on the lender's behalfIn short, lenders aren't prepared to make a deal. And I mean that literally. In only 3 percent of cases where homeowners made a payment offer did the lender's attorney actually have a copy of the offer on file. The attorney knew the status of that offer only 6 percent of the time. In the large majority of foreclosure conferences, the lawyer didn't even have a phone number for someone at the lender to call who can decide whether to accept the homeowner's offer.
Put another way, lenders operating in New York are breaking the law.
By contrast, property owners facing a foreclosure hearing are far more prepared, as you'd expect of someone in danger of losing the roof over their head. Some 45 percent of homeowners had spoken with an attorney before the conference, according to CNYCN. And 29 percent had formally applied for loan modification or were working on one.
So why aren't New York courts enforcing the law? For one, overworked court officials aren't up to speed on howeowners' new rights. Court staff are also ill-informed about their own expanded legal authority in foreclosure cases. As a result, states the report, "the courts apply very little pressure on lenders to negotiate in good faith."
Keep in mind that this sorry state of affairs prevails in a state where laws are on the books to ensure homeowners get a fair shake. No such protections are provided under the federal Home Affordable Modification Program. The $75 billion program, launched by President Obama in March, is also aimed at preventing foreclosures. But with no way to enforce lender compliance, it's been a dud. Reports the NYT:
Lenders have accepted more than 1 million applications and cut three-month trial deals with 759,000 homeowners. But they have converted just 31,000 of those to the permanent new mortgages that are the plan's goal.This was predictable. There's little financial incentive for lenders to participate in HAMP, and homeowners have no legal recourse if they're rejected for loan modification. For its part, the government isn't forcing lenders to play ball, preferring only to "name and shame" them, which might work but for these companies' utter shamelessness.
This problem is more urgent than ever. Even as housing prices level out across much of the country, more and more people are falling behind on their mortgages. That will lead to a surge of foreclosures in 2010, which threatens to forestall recovery in the real estate market and the economy at large.
Don't expect Congress to ride to the rescue. In passing financial reform legislation earlier this month, House lawmakers scrapped the so-called cramdown provision, which would've allowed bankruptcy courts to force lenders to alter mortgage terms for ailing homeowners.
The situation is, quite simply, a travesty.