Bulldozing Houses

We all read recently that a guy who built his own house destroyed it with a bulldozer rather than seeing it lost to foreclosure. Another nut flew his plane into an IRS building.

I am sure there was an awful lot of background to such stories. Maybe these poor souls just went crazy. People don't just resort to insane and irrational acts if they are lucid and normal, or do they?

There is an awful tension building in our country. People have taken bad loans on terms which do not fit with their ability to pay. This is particularly true with sub prime mortgages. The loan amounts were often more than the value of the collateral. The rates were too high, or maybe the initial rates were fine, but adjusted several years into the term of the loan.

Even then it may have worked out, but something happened, like it always does, a job loss, a divorce, an illness. These kinds of events should be actuarially expected, but nobody used any common sense in the creation of the credit.

So the borrower falls behind a few payments, and here is where the real trouble starts.

A mortgage is a contract to loan a sum of money to be repaid in installment, normally over 30 years. For most people, it is by far the largest and most daunting financial transaction they will undertake in their entire lives.

The standard Fannie Mae approved form of a mortgage contract provides that on default, all sums due under the mortgage and note are "accelerated". This means the whole loan gets called, due and payable immediately. The loan documents also state that the bank does not have any obligation to work with the borrower at all. It can simply move like a bulldozer to a foreclosure sale.

The bulk sale of such loans into the secondary mortgage market removed the original lender from ownership of the loan. That is why when you are in trouble, you will no longer be talking to your local loan broker, but rather to some call servicing center in Tucson or Seattle staffed by people who have never met you, never heard of your town, let alone seen your home or met your family.

What is most odd is that the lending industry, which brought us all these defective loan products so happily for a 20 year period, set up a remarkably inadequate system to address problems of the millions of people who have fallen behind and are in fear of losing their homes. A borrower in default simply cannot get in touch with anyone who has authority to make decisions. The Mortgage Modification process is given great lip service but is obviously not working.

So a borrower casts about, trying to get someone to give terms with which he can live in an all out effort to keep the house, getting nowhere but all the while living in complete fear.

Eventually they might file a bankruptcy case, but the borrower's troubles are then only compounded. The long distance lender hires a big foreclosure mill of a law firm, and the bulldozer moves forward. The bankruptcy disintegrates into a series of motions over how much is due, because the loan documents entitle the bank to apply any payments to all attorney fees, charges, taxes, insurance before ever getting to interest and principal. Invariably the lenders have better payment records than the borrower, who has been floundering now for a year or more. Clients ask me constantly "How did the loan get that high?" They don't even know what they owe, and it is hardly worth explaining.

Normally the borrower will lose the home. Some fight it. Some roll instantly.

This is not the worst result. Many of my clients struggled and worked to get a defaulted mortgage under control for years, with no meaningful cooperation from the lender which just keeps bulldozing forward. I often counseled them to give it up and go rent somewhere. Many ultimately did so, and found themselves happy, a few years later, to be free of maintenance, tax payments, snow removal. They were never meant to be homeowners in any event, at least not in the manner they attempted.

The analysis does not end there.

What about the damage being inflicted on the American people by such dismal processes? What about the children who watch as their parents literally lose everything they have? What about headlines which declare that the government is bailing out banks for their poor business practices? How do we clean up this debt mess for our children and our grandchildren?

I could be wrong, but I think I can take a pretty good guess at why that guy bulldozed his house.

Enough is enough.

It's time to take back control.