Force Banks to Modify Their Behavior

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


There comes a point where the evidence is so overwhelming and so compelling that you are forced to reassess your position.  That has happened to me regarding forcing lenders and/or servicers to either modify mortgages or approve short sales.  My position was that even though lenders may act foolishly or even cruelly with regard to dealing with a home owner in trouble, it would be worse in the end to force a lender and/servicer to modify a loan or approve a short sale.  Not any more.  The evidence is in and we need to force banks to modify their behavior.


There is no doubt that lenders and mortgage servicers are working solely in their own interest and it should be just as clear that those interests are not aligned with the interests of anyone else; not the investors they are supposed to protect, not the borrowers whose lives have been torn apart and certainly not our nation as a whole.  The Obama administration has tried the carrot approach with financial incentives.  That did not work because the government wrote them a check for a few hundred million.  The lenders and servicers said thank you and went back to doing whatever they pleased.  The stick approach was also tried by “shaming servicers” into doing the right thing as if the servicing industry is capable of shame.  In other words, the servicers do not give a damn what anyone thinks.  Why should they care?  Absent government support they are already insolvent and they know that they will not be allowed to fail.


Of course servicers would argue they are being “overwhelmed”.  This is as if we should feel sorry for them because they are being burdened with dealing with all those “irresponsible borrowers” who did not see the absolute destruction of the capital markets coming around the corner the way nobody else did.  Being a lender or servicer is hard.  Let’s hold a telethon for them.


Let me get this straight, Bank of America, Chase and Wells Fargo expect us to believe that they simply cannot answer the phone.  Anything over a few hundred calls a day and these places shut down.  This is in spite of the fact that the financial sector is running at full employment and has received billions of our tax dollars.  I cannot listen to this drivel any more.  If they spent even a fraction of this money on hiring and training people to help in modifications and short sales, the national employment rate would drop by 2%.


Now let us look at the arguments these companies use as to why forcing them to modify their behavior is a bad idea:


Loan Modifications do not work because a huge percentage of borrowers redefault.  This is the dumbest argument ever.  We should all understand that the term “loan modification” is a synonym for “lower your payment.”  However, going back to 2008, over half the loan modifications resulted in higher payments.  Gee, who could have seen redefaults coming?


It’s not our fault, the investors made us say no.  This is perhaps the biggest lie.  Which investors said no?  Was it those investors that refuse to maximize their own returns?  Why would an investor refuse to modify an underwater mortgage in this market when the alternative is almost always more costly?  Unfortunately the public has bought into this lie.  I think the banks and servicers have counted on the fact that the public and the investors they are supposed protect did not read the pooling and servicing agreements.  Most servicing agreements basically say that the servicer must take steps to maximize the returns for investors.  This is something they never do.  Proof of this could be seen in September when Impac Funding, an investor that uses Bank of America and GMAC to service many of their mortgages started contacting borrowers directly.  It seems Impac was tired watching their servicers foreclose.  When Impac dealt with this directly, loans were modified within 72 hours and it has already improved their returns.


So what is the solution?


The answer is to reform the bankruptcy code.  If a borrower files for bankruptcy, the bankruptcy judge should be allowed to cram down the mortgage.  What this means is that if there is $400,000 mortgage and the home is worth $300,000; guess what?  You now have a $300,000 mortgage.  In other words, forced judicial modifications.  I would even go so far as to give this same power to judges in foreclosure proceedings.


The simple fact is that foreclosures are continuing to destroy the value of mortgage backed securities that are still on the balance sheets of our nation’s banks.  At some point, the taxpayer is going to have to buy those assets so these banks can return to some semblance of normalcy.  The lower the value of those assets, the higher the hit to taxpayers.


What is the argument against forced modifications or short sales?  If you do this, banks will not lend money, it will be harder to get a loan and interest rates will go higher.  To me, this is a crock.  Why?  The proposals for forced modifications would apply to only current mortgages, not future ones.  That argument goes out the window.  Even if this were not the case, just imagine what this country will look like if things continue the way they are going.  If we do not stop the march of foreclosures, our economy will head into a deflationary death spiral that will drag the economy down.  A recent research report by Deutsche Bank estimated that about half of all homes in the US will be underwater by 2011.  Just try getting a mortgage under those circumstances.  Unless we enact this reform, lenders will be in worse shape.  If home owners have no hope, if there is no hope of equity in the future, then home ownership in this country is on borrowed time, perhaps for a generation.  Our economy cannot survive under those circumstances. This cannot be helpful to investors and lenders as well.


Comments (44)

James Lyon
Vista Pacific Realty - Sacramento, CA

I agree, something, some alternative to the lengthy muddled process that we have now.

Dec 11, 2009 09:14 AM
Jeremy OnullNeal
Corona Realty - Corona, CA
Corona Real Estate Expert

Paul, Great post. I can tell you first hand that I dealt with a number of clients that had modifications offered to them from the banks in 2008 and these so called " modifications" did result in higher payments. I think the Bankruptcy idea is a good idea, and could really get things moving. What we need is MOVEMENT, the banks are taking way too long to get the modifications done, I have one client who has been negotiating a modification for 24 months. Imagine living in a home and not making a payment for 2 years! Regardless of the loss the modification would result with this homeowner the bank would have been in a much better position 18 months ago to cut the principal 40% and begin taking payments on the new loan. The lost revenue from 24 months will not be recovered and should the bank foreclose and take the property back they will lose 60% of the principal balance plus selling expenses. The sooner the modification gets done the better off everyone will be. Thanks again for a great post.

Dec 11, 2009 10:54 AM
Lisa VonBargen
Photography7522 - Estes Park, CO
Estes Park Real Estate Photographer


I totally agree...the sooner banks do not have the possiblity of a bail-out may change the way they do business and do us all a favor.

Dec 11, 2009 11:41 AM
Sal Antsipenka
Naples, FL

I have been saying this for a long time now - we need more of real check and balances for the government and more education for the population. Corrupt and stupid make a very good case for a disaster.

Dec 11, 2009 12:12 PM
Dan Pittsenbarger
Keller Williams Western Realty - Bellingham, WA
Improving Conditions

Good Post Paul,

I totally agree with you in that banks at least high in the food chain operate for self interest rather than greatest good for all. Anyone interested in getting a bit of insight into the banking industry, bail outs and other tricks of the banking trade should check out the following book.

However, I do think Paul has valid points as well. I'm not sure that coming up with the short sale concept as that great of an idea. A deal is a deal. Pay "X" amount of dollars a month until the loan is paid off or loose the property. Everyone agrees to the terms. All the parties loan officiers, agents, escrow folks and the buyer have ample time to fully understand the commitment and what they need to do. It's not that I don't have empathy for those in trouble. I just think ones word and integrity is much more valuable than real estate or money. I don't see anything "wrong" with following the terms of the original agreement. It may not be the best solution but it sure would handle the short sale bottle neck - no more short sales.


Dec 11, 2009 12:31 PM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

In the long run, your cure would be worse than the disease.  Instead, we need to make sure that nobody is too big to fail...

Dec 11, 2009 01:26 PM
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Paul -- Great post and it struck a nerve with many intriguing comments.  I think cram downs should be explored, it might make the holders a bit more responsive, it's worth testing out.

Dec 11, 2009 02:40 PM
Nathan Tutas
Tutas Towne Realty, Inc. - Davenport, FL
Your Central Florida Real Estate Expert

Glad you changed your mind. The banks should have been taking steps in this direction a long time ago.

Dec 11, 2009 03:44 PM
Paul Warkow
Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

James and Jeremy-The cram down procedure was always a tool for a bankruptcy judge until 6-7 years ago when Congress reformed the bankruptcy laws.  No reason it cannot be put back.

Lisa-It was not the bail out itself that was wrong.  It was that that we allowed the banks to do whatever they wanted with the money.  The bail out should have come with strings attached, but with steel cables.

Dan-In bankruptcy court, a judge already has the power to modify contracts.  It is done all the time right now.  That is the whole point of going into bankruptcy.  As I said before, the power to modify first mortgages was just recently taken away by Congress.  It is time to put it back.

Lane-I used to think the same way.  We now have a system which encourages borrowers to walk away from their homes rather than fight to keep them.  The cure is no longer worse than the disease.

Chris-We used to allow judicial cram downs so it has been tested and  the world did not come to an end.

Nathan-You are right.  We have to take steps now.


Dec 12, 2009 01:21 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices


I find the call to forcefully influence businesses outrageous at best. And please, when you say WE NEED TO FORCE BANKS... do not count me in. I am sure there are others who wouldn't want to be in either.

Or, BTW, when the banks agree to take less, will you return your commission for that bad deal?

Weren't that us, the agents behind each such "bad" deal, who stood right there, with eyes wide open and had no problem whatsoever with the mess that we so happily helped to create?

Am I day dreaming for some decency here?

Dec 12, 2009 05:09 AM
Scott Taylor
Realty Center - Orlando - Ocoee - Orlando, FL

I think you're right. Unless they change we'll be in much worse shape!

Dec 12, 2009 05:49 AM
Paul Francis
Francis Group Real Estate - Las Vegas, NV
Las Vegas Real Estate Agent - Summerlin Homes


Just to clarify -- I'm not blaming anybody. Saw what was going on years ago so I'm well past the blame game stage. The blame game is pointless at this stage.


Dec 12, 2009 05:49 AM
Robert L. Brown - Grand Rapids, MI
Grand Rapids Real Estate Bellabay Realty, West Mic

Very informative post here. As we all know this is a big mess that seems to be spiraling out of control. Hopefully within the next few years we can see the light at then end of the tunnel.

Dec 12, 2009 07:31 AM
John Mulkey - Waleska, GA
Housing Guru

Paul - While I am a "free market" person, I support the concept of lenders reducing principle balances on mortgages facing foreclosure where the mortgage exceeds a home's value, and if having bankruptcy judges do so is required, then that may be the only course. 

Many seem to overlook the fact that this is not a "traditional" recession; we face a collapse of the entire housing market if we fail to act.  Whatever action we take will have lasting consequences, but failure to act could be the most devastating. 

And to respond to Paul Francis, there have been numerous reports of modifications resulting in higher payments from CNN Money, the Wall Street Journal, and others. I've provided some links below.

PR Web

CNN Money


Dec 12, 2009 07:44 AM
Mark Watterson
Salt Lake City, UT
Utah Real Estate

Comment #9 is right on the mark and the sooner we come to terms with reality the sooner we get the country on a positive track.

Bankruptcy cram downs will work and it will give bank the motivation to be more proactive with loan modifications.

Dec 12, 2009 10:00 AM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

So, if banks start being forced to cram down mortgages... and raise rates to cover those losses... fewer people will be able to buy homes.  This will lead to lower prices.  The lower prices will put more people upside-down... leading to more modifications and cram-downs. 

Dec 12, 2009 03:11 PM
Paul Warkow
Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

Jon-Forcing a bank to take a cram down through the bankruptcy procedure is nothing new.  It has been done in the past and the world did not come to end.  It is still done for many other secured debts, just first mortgages are treated as sacred cows.  I may  not have to return my past fees on mortgages but I am sure paying for it now.  It is much harder to get mortgages approved takes about 4 times as long, I am now subject to much more government regulations and restrictions and my fees are less.

Paul-I agree that looking back and blaming gets us nowhere.  I only hope we learn from our mistakes.  Unfortunately sometimes we learn the wrong lessons.  Going back to your previous comment, if you search "Peter Schiff" on You Tube, what you see is unbelievable.  Over two years ago he predicted almost exactly what was going to happen and here are those "geniuses" on CNBC making fun of him back then.

John-Thnaks for the links.  I forgot to post them in my previous comments.  Boy there is a lot to cover!

Mark-I totally agree.

Lane-If the house goes into foreclosure aren't the lenders going to suffer a bigger loss?  Not only are banks going to suffer a bigger loss, but because now you have a foreclosure, the house values in the neighbor are going to go down.  A foreclosed house will also contine to go down in value as it sits vacant and the downward spiral continues.  A cram down forces the lender or servicer into the reality that if you have a $400,000 mortgage secured by a $300,000 house, you no longer have a $400,000 mortgage.  Let us try to keep home owners in their house and stop the bleeding.


Dec 13, 2009 01:29 AM
David Epperson
Mortgage Settlement Consultants - Walnut Creek, CA

My two cents worth on Paul Francis's calling BS on loan modifications resulting in higher payments.  While, like the original poster, I do not have data resources to quote, I have personally seen loan modifications result in higher payments.

Here's how the scenario goes:

Homeowner sees they are heading into trouble if they don't do something about their mortgage payment.  They do the responsible thing and approach their bank about a loan modification.  If they are tenacious about it, they MIGHT actually get a response, almost always saying (until very recently), "We don't do modifications when the homeowner is not in default on the loan."

So the homeowner, in order to fit into their bank's program guidelines, stops making payments.  And after a few more months of tenacious efforts to initiate negotiations with their bank, they get a loan modification that might drop their payments by $100/mo.  But then they have all these delinquent payments and fees that are not addressed within the modification.  So the lender "does the homeowner a favor" and lets them finance those late payments and fees into a small short-term unsecured note that ends up, not with the lender, but with a small debt administration company.  And so the payment on that note is maybe $150/mo.  Net result - A $50/mo payment increase.

So sure! . . . When you look JUST at the loan mod, it looks like the bank saved the homeowner $100/mo, because the other $150/mo is swept out of sight and shuffled off to someone else so as to appear it's not part of the modification. 

This is no longer typical.  But back in 2008 it was the norm, especially with Wells Fargo.  That type of data does not appear in large data studies.  But let me assure that I know FIRST HAND from homeowners that it did occur. 


Dec 13, 2009 08:46 AM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

Paul, in many cases (I don't have inside information, but I have read from those that say they do) it seems that the banks takes the whole loss if there is a modification.  But, if there is a foreclosure, the PMI company takes the hit on part of the loss...  So, it isn't in the banks interest to take the mod. 

Fix that little issue, and more mods get done.  Get the insurance companies involved.

Dec 13, 2009 12:13 PM
Paul Warkow
Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

David-your example is typical

Lane-This gets back to my original point.  Who gets hurt here, not the banks or the servicer.  It is the investor, probably inviolation of the servicing agreement and the borrower who get hurt.

Dec 14, 2009 01:55 AM