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Can a Lender Be Forced to Modify a Mortgage?

By Paul Warkow

Services for Real Estate Pros with Paul Warkow-D.G. Weber Law Associates

November 12, 2009 03:27 AM

4 home owners are suing Aurora Loan Services because they refused to participate in the government sponsored mortgage assistance program (HAMP). The outcome of this lawsuit has far reaching implications. If the plaintiffs are successful, the courts are saying that a party can be forced to alter the terms of a contract, in this case a mortgage. If this should happen, banks will be extremely reluctant to lend money because at a nay time they could be forced to renegotiate the terms of the mortgage. This will mean fewer loans and higher interest rates.

It is one thing for a lender to come to the conclusion that it is in their best interest to agree to a loan modification or a short sale. Even if it is obvious that a lender should agree to a loan modification or a short sale, it is wrong and short sighted to force them to do so. In the end this kind of thinking will make matters worse, not better. There are government programs that give lenders incentives to agree to a loan modification or a short sale. However, in the end, it is still the lender’s decision.

The only regulations I would put in place is that if the lender chooses to modify a loan or agree to a short sale, there should be time limits and standards in place. It is wrong for a lender to string a borrower along. The lender have the option to participate or not, but if the decision is made to modify or allow a short sale, get it done quickly or reject it quickly. This lawsuit will take that decision away. It would interfere with the sanctity of the contract. I hope the plaintiffs are not successful.

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Jennifer Grace

Elk Grove, CA

Jennifer Grace

The plantiffs must be Republicans? They need the government more involved in their daily lives. Even though the governemnt didn't loan them the money.

There is always the pending Foreclosure that can "save" the homeowner. It wipes out their debt. So what if their credit is screwed - everyone they know now has bad credit. And if they're doing a loan mod, their credit is probably already shot.

It really is in the banks best interest to speed up the short sale process. Get rid of that non-performing loan! Move on.

Nov 12, 2009 03:41 AM

Kimberly Thurm

Berkshire Hathaway HomeServices Chicago - Naperville, IL

Broker / Relocation Consultant ABR, CRS, GRI, SFR

I am not sure. This is a tough one for me... I have seen clients try to negotiate with their banks and fail. One in particular comes to mind, the seller was behind in payments. The bank would accept $8,500 down towards the arearage. Then the homeowners would have to make 6 more payments at a payment and a half - then they could go into a revision process where "maybe" they could have their interest rate adjusted down, the lowest it would go down would be 5%. Only Maybe - No guarantees... The home was worth much, much less then they paid for it in 2006 of course. After speaking with their attorney and a lot of heart wrenching and soul searching. They determined that they could come up with the $8,500 down, however, they were not sure if they could keep up the accelerate payments for six months with one of them being on unemployment. Then on top of that, to possibly not get their payments adjusted & lowered could mean they would be back in the same boat in the future. At which point there would have no money whatsoever to move out and rent something with security deposits, 1st & last months rent etc. Plus we felt the home was worth approximately $80,000 less then what they paid and there is no determining how soon the value of the home would start go back up. Since the bank was not offering anything further they decided, very sadly, to let their home go and move out. The bank got back the home, placed it on the market and the home ended up selling for approximately $110,000.00 less then the original owners paid for it.

Nov 12, 2009 03:54 AM

Paul Warkow

Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

Jeremy- I agree they no one should be forced to modify the terms of a contract. This will lead us down a dangerous road. Even though it appears that lenders are making decisions that make no sense, it is still their decision.

Donna- I do not know how the lawyers are being paid, contingency fee maybe?

Tony- We are a litigious society. You would not believe what goes on in New York. Every closing has 3 attorneys. It is a miracle anything closes.

Jennifer- I am not following your logic. This is a lawsuit between private parties, the government is not involved, yet. Obviously the homeowners in these cases want to stay in their homes. To them foreclosure is not an option. It is also clear that lenders continue to make absurd decisions that hurt not only the borrower but themselves. However, it should remain the lender's decision.

Kimberly -There are many horror stories about how banks have lead borrowers around by the nose. My point is that the lender should not be forced into modifying a mortgage. The lender should be required to give a yes or no answer and then quickly come to an agreement based on transparent standards.

Nov 12, 2009 04:08 AM

Lane Bailey

Century 21 Results Realty - Suwanee, GA

Realtor & Car Guy

Last year there was talk of putting "Cram-Down" provisions in residential mortgages, effectively allowing the courts to alter valid contracts. Anyone with any sense could see that this would push interest rates up... like it has done in commercial and investor loans where Cram-Downs are more common.

Nov 12, 2009 01:33 PM

Lloyd Binen

Certified Realty Services - Saratoga, CA

Silicon Valley Realtor since 1976, now retired.

Eveything is crazy. Why would borrowers think they have a right to negoiatate their loan after they agreed to the price and terms? Because that's what the administration is putting pressure on lenders to do. Lenders don't get a portion of the equity if the prices go up. If the lender believes it's in their best interest to negoiatate, then they will. The government needs to get out of the business of modifying private contracts. Isn't that what Hugo Chavez does?

Nov 12, 2009 01:47 PM

Stephen Kappre

KW Hometown - Mantua, NJ

Helping You Home

Well, with the way things are nowadays, people think they are entitled to everything.

Nov 12, 2009 01:57 PM

Aaron Vaughn 830-358-0455

Conifer Builders LLC - Canyon Lake, TX

"Spill some coffee ..." That's a great one, Donna! Seriously, this is insane, even for a lawsuit. I only worry because judges are often some of the more stupid people on earth, and I could see this lawsuit being successful. If it is, we are all in trouble!

Nov 12, 2009 03:24 PM

Roland Woodworth

Benchmark Realty - Clarksville, TN

Benchmark Realty

This could be a very interesting case to follow. Please keep us posted on this one.

Nov 12, 2009 03:38 PM

Charles Perkins

Charles G. Perkins, CPA - Burien, WA

This case could definitaely have some unintended consequences. Forcing loan modifications doesn't sound like the wise thing to do. Its quite understandable though that the public is upset that lenders that where bailed out are doing nothing to help home owners. There are no winners here.

Nov 12, 2009 04:25 PM

Matthew Ferrara

-- www.matthewferrara.com - Boston, MA

Matthew Ferrara & Company

Perhaps Atlas is Shrugging?

Nov 12, 2009 04:41 PM

Adrienne M. Smith

Adrienne Michelle Smith - San Ramon, CA

I Turn Challenges into Opportunities

Hurray for the Homeowner's! The Banks/Servicers have sucked the Taxpayers dry and I think they should be forced to do something other than give arbitrary rejections to borrowers with regard to modifying loans.

Nov 12, 2009 05:36 PM

J. Philip Faranda

Howard Hanna Rand Realty - White Plains, NY

Associate Broker / Office Manager

I theory I think the less the government forces private enterprise to do, the better. That said, I have seen lenders do so many arbitrary, foolish, illogical things that I almost root against banks in lawsuits as a default setting. Of course, the only thing worse than a legislative mandate is a court mandate. God help us all.

Nov 12, 2009 08:26 PM

Paul Warkow

Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

Thank you for all your comments. i think that you would be creating more problems than you are solving by forcing a lender to enter into a loan modification. It is easy to want to bash banks because they have been bailed out and yet continue abuse the public. The only requirement I would impose on lenders is that they make quick decisions on whether or not they will modify and follow standardized and transparent guidelines when entering into a loan modification negotiation.

There was an interesting comment, number 7, about cram downs in bankruptcy. What that is referring to is a proposal to allow bankruptcy judges the power to alter terms of a mortgage and actually lower the amount owed to the value of the house. Obviously, this would be judicial modification of a contract. Actually, I am in favor of this. That is what happens in bankruptcy proceedings all the time. Judges will throw out contractual obligations or modify them. This what happens in Chapter 11 proceedings every day. Why should a lender be immune from this?

Nov 12, 2009 10:34 PM

Lew Corcoran

Better Living Real Estate, LLC - East Bridgewater, MA

Expert guidance. Exceptional results.

A mortgage is a contract. These homeowners were not forced into the mortgage they selected. And, they entered into the contract of their own free will. Thus, no lender should be "forced" into modifying the "contract." Now, some lenders will modify a mortgage because it's in their best interest to do so. Basically, these lenders are probably the ones who are holding your mortgage note.

However, some lenders believe it's better to let a home go into foreclosure.

Bear in mind that in most cases, the lenders don't hold the mortgage notes anymore. They have been sold off to investors. Thus, when you want to modify your mortgage, you're really dealing with the investor(s) who bought your mortgage note, not the lender. So, how do you "force" the lender to modify a mortgage contract they don't own?

Basically, if you can't perform (i.e., pay your mortgage), then your option is "sell your home." If you can't or are unwilling to sell your home - even at a loss, then you can expect the lender (or note holder) to foreclose on it. If lenders are 'forced" to enter into modifying a mortgage contract, then you can watch mortgage interest rates go through the roof as their risk for entering into these contracts just skyrocketed.

Nov 13, 2009 12:09 AM

Paul Warkow

Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

Tim and Lewis- Exactly, it is ultimately the lender's or the investor's decision as to whether or not to modify a loan. We may believe that the lender is acting foolishly, against their own interest or even in bad faith, but it is their decision. As is pointed out, the consequences of forcing a lender to act "reponsibly" are less availability of mortgages and higher rates.

Nov 13, 2009 01:03 AM

Tom Burris

NMLS# 335055 - Baton Rouge, LA

Texas/Louisiana Mortgage Pro - 13 YRS Experience

This bailout mentality will be the downfall of America.

Seems to be fostered by some too...

Nov 13, 2009 04:41 AM

Lane Bailey

Century 21 Results Realty - Suwanee, GA

Realtor & Car Guy

Paul. Notice the difference in rates between a mortgage and a credit card? Maybe this is because of the different levels of risk. Imagine if a judge could just toss your mortgage... think that new loans would have higher rates?

Nov 13, 2009 03:09 PM

Paul Warkow

Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

Lane, there are a lot of reasons why mortgage rates are lower than credit card rates. The first is that mortgages are secured by home. Credit cards are unsecured. Secondly, not only is it secured by an asset, the home, it is an asset that is not going anywhere. Most mortgages require homeowner's insurance so that if something happens, the lender is protected. Thirdly, most approvals for a credit card are based on a one page application. The approval process for a mortgage is much more rigorous. One of the reasons we got into this housing mess is when the application process for a mortgage began to look more and more like the application process for a credit card.

Right now, under bankruptcy, a lender is vulnerable to losing a great deal of the amount owed. If a borrower files a Chapter 7, the house will be sold for whatever the market will bear and the borrower is off the hook for any deficiency.

Nov 14, 2009 02:37 AM

Lane Bailey

Century 21 Results Realty - Suwanee, GA

Realtor & Car Guy

But Paul... Think about what you said. If a judge can modify the mortgage easily, what happens to the rate? Is the mortgage really secured by the home if a judge can decide that it isn't?

Nov 14, 2009 12:03 PM

Paul Warkow

Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

Lane- What I am saying is that right now, if a house goes into foreclosure, what does the bank get? It it is sold at an auction, a bankruptcy sale or as an REO, the lender will receive the value of the house (at least in theory). It will probably receive less. More than likely the mortgage will be greater than what it receives so it is taking a loss. If the borrower declares bankruptcy, the bank will take a loss. Any deficiency owed by the borrower to the lender will be wiped out. Banks know this risk exists right now.

For years, banks did not care because they believed this scenario was impossible. As long as housing prices rose, they would never suffer a loss. Through an auction, sale or REo, they believed they would always recover everyhting. Allowing a cram down provision would not change the reality that a bank is going to lose money if a borrower files for bankruptcy. By the way, this would apply only in a Chapter 13 situation. The proposals I have seen to allow a cram down would only apply to past mortgages that were issued before a certain date, not new mortgages going forward. This would take away the disincentive you are talking about.

Nov 15, 2009 01:01 AM