As the mortgage crisis drags on, it continues to spawn dangerous myths and legends about the foreclosure process. As a mortgage foreclosure defense attorney, I know that believing these stories can put a home in real peril. I have been helping homeowners defend foreclosures in Connecticut for more than five years, so I’ve had a front row seat on just how destructive believing these stories can be.
Homeowners who buy into them can actually impair their ability to save, or at least remain longer, in their homes. The problem is that these myths encourage homeowners either to take the wrong action when faced with a foreclosure or wait too long to take the right action.
Here is the truth behind these myths:
Myth and Legend 1: The bank or servicer decides whether and when a borrower’s home is foreclosed.
This is not true in all states. In Connecticut, for example, a borrower’s house cannot be taken, or sold, unless and until a judge says so. That only happens towards the end of a foreclosure lawsuit process.
Think of the foreclosure process in Connecticut like a train. The summons and complaint is the first stop as the train rolls down the tracks. The bank or servicer is trying to get to the last stop, which is called a “judgment of foreclosure.” Even if borrowers do nothing to respond to the summons and complaint—which is not a good idea in any event—it still most often will be at least two or three months before the house is taken. In other words, the bank or servicer is not the “All Powerful Oz” and does not take homes by flipping a switch. It takes time. Time borrowers should use wisely.
Myth and Legend 2: Banks and servicers won’t schedule a sale while they are considering borrowers for a modification.
Borrowers who believe this myth put trust in a stranger who may or may not understand their situation or how the foreclosure process works in Connecticut. They should not believe anything that a bank representative at the other end of a 1-800 telephone number says. I’ve had clients who were told by these representatives that applying for a modification would essentially halt any mortgage foreclosure proceedings. That may or may not be the truth. It’s best for borrowers not to trust such advice.
Remember that foreclosure in Connecticut is a process. So, when the bank or servicer says there will be no foreclosure or no sale, they don’t mean they will not start the process. They mean they will not complete it.
Those believing this myth will often get a summons and complaint but ignore it because they are working towards a modification. The real danger here for the borrower to think that it’s okay to ignore the summons and complaint because the bank or servicer said there would be no foreclosure or sale. Why? Because the bank or servicer might be moving the foreclosure lawsuit train without their knowledge. They may end up in a situation where the bank denies their modification request and immediately moves the train into the ‘judgment of foreclosure’ station. There are things borrowers might have been able to do to slow that train down, make it stop at additional stations, or derail it, but they have to do them at the right time. If they don’t, they could lose the opportunity.
Myth and Legend 3: If a bank or servicer already is considering borrowers for a modification, they don’t need to participate in Connecticut’s foreclosure mediation program.
Like the other myths and legends, this is also not true. In Connecticut, for example, when the bank or servicer serves a homeowner with a foreclosure summons and complaint, by law they must invite the homeowner to participate in the state’s foreclosure mediation program.
It applies to those in one-to-four family homes, occupied as the homeowner’s primary residence and where the homeowner is the borrower. Once this homeowner receives an invitation to participate in the program, they can decide whether or not to accept it. If you participate in the state’s program, there’s a state employee (called a mediator) who looks over the shoulder of the bank or servicer to make sure they are considering the correct information. Borrowers should consider this invitation seriously.
One of the program’s main goals is to facilitate mortgage modifications. The difference between applying for a modification in the program and out of the program is that, in the program, the mediator makes sure that the lender is considering the correct information, making the correct calculations and is not unduly burdening the borrower with requests for additional information. Borrowers don’t have that oversight when it is just them and the bank or servicer looking into a modification. Also, those participating in the state program have the protection of knowing that the foreclosure lawsuit train can’t move for up to eight months. There is no such limitation if they do not participate in the state’s foreclosure mediation program.
Myth and Legend 4: A bank or servicer has to give borrowers a mortgage modification.
This is simply not true. If your bank or servicer signed on to participate in the Federal Making Home Affordable program and borrowers meet certain criteria (for example, borrowers have to have experienced a financial hardship), the bank or servicer likely has to consider the borrowers for a Home Affordable Modification Program modification.
But that only makes the borrowers eligible to apply; it does not make them entitled to a modification. The bank or servicer still gets to consider the borrowers’ financial situation and whether it will make more, or less, money by modifying their mortgage than by foreclosing. In deciding whether to grant a modification, the bank or servicer must follow written HAMP guidelines.
While these are probably closer to rules than merely guidelines, banks and servicers do try to exploit what may be loopholes. Even in the best circumstances, the guidelines do not guarantee anyone a modification. Borrowers can find a list of participating banks and servicers, the eligibility criteria and the HAMP guidelines at the MHA website.
If their bank or servicer does not participate in the MHA program, or their loan does not meet the requirements to be eligible to apply for a HAMP modification, their bank or servicer may, but does not have to, consider them for an “internal” or “in-house” modification. In those cases, banks and servicers are not restricted by any verifiable rules or guidelines when it comes to mortgage modifications. They can do whatever they want in these matters.
Myth and Legend 5: Banks and servicers give modifications because that’s the only thing that makes sense under most circumstances.
What makes sense to borrowers and what makes sense to the bank or servicer is not the same thing. For the bank or servicer, deciding whether or not to offer a modification is purely a business decision. What they will be asking themselves is whether they lose less money by modifying the mortgage or foreclosing? What they are looking at is the size of the loss, not the gain. That’s because banks and servicers know that such houses are probably underwater. They use complicated mathematical formulas (sometimes called “net present value” calculations) to help them make a decision. These calculations are designed to estimate the total amount of money, adjusted for things like interest and inflation, that the bank or servicer will collect from borrowers’ payments on a modified loan. This is one reason why banks or servicers almost never reduce the principal balance of the loan. If they modify the loan and cut principal, they have no hope of ever collecting that lowered principal. If they don’t cut principal, they keep hope alive that they will collect it all in 10, 20, 30 or 40 years.
Sadly, the human element does not factor into the bank’s or servicer’s modification decision. I don’t think it’s because they don’t care that borrowers are sick and can’t work, or that borrowers will be out on the street if they foreclose. They operate businesses and have obligations to shareholders. They don’t see the moral issues as business issues.
Myth and Legend 6: Banks or servicers will help if the borrowers let them know they are in trouble before they default.
While this myth is one of the most common, it’s just that—a myth. I am surprised at how often I continue to hear this one because it defies common sense. Why would a bank or servicer help someone who has been paying and only thinks he or she might go into default? Borrowers are not a problem for their bank or servicer until they are in default. Even then, borrowers might not really be a problem until they are several or more months behind. I’m not saying that borrowers should not alert their bank or servicer to a potential problem. I don’t think it can hurt them. I’m just saying that I don’t think they should expect any relief. It’s great if they get it, but they should not be surprised if they don’t.
The prospect of losing a home to foreclosure is a frightening one. I urge homeowners faced with this possibility not to ignore the problem. They should respond to all paperwork, learn their options and work with someone who’s been through the process. No doubt, it’s a tough maze to navigate but if they do those things and reach out for the right help, they just might find a way to make the best of a difficult situation.
Christopher Brown is a mortgage defense attorney and partner in the Connecticut and New York based law firm of Begos Horgan & Brown LLP.