Almost without exception, every homeowner with a troubled mortgage wants to hang on to the house.  “It’s our home”, they insist.

While before the Great Recession, the obstacle to keeping the house was measured by the amount past due on the mortgage.

Now, we need to factor in the often precipitous fall in home values.  Even homes with mortgages that are current  in Northern California  are often underwater by several hundred thousand dollars.

In California, we’ve heard for years that a home is the best investment we could make.

That line was so compelling that lots of the people I see in my bankruptcy practice neglected saving for retirement on the theory that the equity in their home was their retirement.

Now that the equity is gone, homeowners often say, “well, I will hang on until the value comes back so I don’t lose money”.

Every month that paying for your house costs more than renting, you are losing money.

You’re losing the money  that exceeds the cost of renting that is poured into the underwater house.

If you could rent for $3000 and the house costs you $5000 a month (including property taxes, insurance, HOA, and maintenance), you are pouring a fresh $2000 a month into a hole in the water.  That’s $24,000 a year, or nearly a quarter of a million dollars in a decade.  Is that the best use of money?

There are two sound counter arguments:  one is the tax advantages given to paying mortgage interest, and the other is the protection against inflation that a fixed rate mortgage offers.  The tax advantage of homeownership is often smaller than many borrowers think.  The protection against the cost of rental housing rising is, in my mind, a far stronger argument to keep the house.  It only applies if the interest rate on the mortgage is fixed rather than variable.

End game

For those who want to ride out the dip in home values til the underwater house is no longer underwater, my question is, how long will that take?

My second question is: what do you gain from the effort if the “prize” is nothing more than the ability to sell the house for what you owe on it?

To help in thinking about how long it will take for an underwater house to be worth what’s now owed, I created a web-based calculator to answer the question, how long til my home’s value recovers?

The underwater home calculator works like this:  you enter the value of the home today; the total of the debt on the home; and the rate at which you assume that real estate will appreciate on average in the future.  Click the button and it tells you in years, months and days how long you have to wait for the home’s value to equal the debt.

Then you have facts to add to the discussion about should you keep the underwater house.

 Image courtesy of mstoeck.

The theory is, of course, that this plan would give underwater homeowners a chance to get caught up.  Most of the payment that is made on a mortgage, particularly during the first 20 years, goes to interest.  This would re-direct that money to principal making a real dent in the amount of principal a homeowner pays.

A good idea?  Certainly, and one geared to not cost the mortgage companies, and to save the homeowner.

A good number of Congress persons have pushed the Federal Housing Finance Agency (FHFA) to implement the plan.  But, alas, FHFA Director DeMarco’s has recently written to Congress informing them that the agency would not be implementing the Principal Pay Down Plan.  FHFA concluded that the proposal would not be all that helpful, since few GSE (Government Sponsored Enterprises like FHA) borrowers have filed for chapter 13 bankruptcy and are underwater.  I guess he doesn’t live in California (or Florida or Arizona or …).

Not to worry, DeMarco said he’ll continue to encourage the HAMP program.  Great!

So, for now, there is no real relief in sight from the US Government.

With so many states strapped for cash the settlement will no doubt be a welcomed pay day. Similarly with the election year ahead the incumbent wants signs the economy is recovering well before November rolls around. External pressure aside the American people are ready to move on with their lives and get back to work.  It is unclear how resolving claims against the big banks will allow this to happen, but the link between the two is front and center in the media.

What the economy needs to move forward is trust and how the settlement will begin to rebuild the people’s trust in our economic system again is unclear.  While resolving disputes without litigation is beneficial I can’t help but think there is an opportunity in the settlement being overlooked.

Sponsored by HUD, the Making Home Affordable Program, HOPE NOW and NeighborWorks America, admission is free.

You can either bring documents showing your household income and expenses such as your last two paychecks; information about each of your mortgages including lines of credit; statements for each of your other debts; and bank account statements, or, you can access and complete the Request for Modification form found at MakingHomeAffordable.gov.

There are helpful videos at www.youtube.com/user/MakingHomeAffordable.

You can also call 1 888 995- 4673 for more information.

The application for a review is available online at www. smcare.org.  Or call the assessor’s office at 650 363 4500.

There is no charge for the review.  But the deadline is Tuesday, February 15th.

“Foreclosure Mediation Programs: Can Bankruptcy Courts Limit Homeowner and Investor Losses?”

Senate Judiciary Committee – Full Committee

http://judiciary.senate.gov/hearings/hearing.cfm?id=4960

DATE:February 1, 2011
TIME:10:00 AM
ROOM:Dirksen-226

OFFICIAL HEARING NOTICE / WITNESS LIST:
January 25, 2011

NOTICE OF COMMITTEE HEARING

The Senate Committee on the Judiciary has scheduled a hearing entitled “Foreclosure Mediation Programs: Can Bankruptcy Courts Limit Homeowner and Investor Losses?” for Tuesday, February 1, 2011 at 10:00 a.m. in Room 226 of the Dirksen Senate Office Building.

Senator Whitehouse to preside.
By order of the Chairman.
Witness List
Hearing before the Senate Committee on the Judiciary On
“Foreclosure Mediation Programs: Can Bankruptcy Courts Limit Homeowner and Investor Losses?”
Tuesday, February 1, 2011 – 10:00 a.m.
Dirksen Senate Office Building, Room 226

The Honorable Robert Drain
United States Bankruptcy Judge
Southern District of New York

John Rao, Attorney
National Consumer Law Center
Boston, MA

Larry Britt, Homeowner
Riverside, RI

Dr. Anthony B. Sanders
Professor and Senior Scholar
The Mercatus Center, George Mason University
Fairfax, VA

Andrew M. Grossman
Visiting Legal Fellow
The Heritage Foundation
Washington, DC

The only genuine accomplishment  of HAMP is the reminder that only 31% of  gross household income should be spent on housing.  In every other way, the program has been too little and what it provides is too often illusory.

Certainly here in California, we absolutely lost track of that budgetary rule of thumb.  Housing costs often soared above 50% of income.  We rationalized that the house was an investment, that California real estate always goes up, and our home was our retirement plan.  All of those rationalizations have soured.

The HAMP target for loan modification is a monthly payment, including property taxes, of 31% of the household’s gross income.  Applied to many of my clients, after deducting California property taxes, the resulting mortgage payment is often half of the  contractual payment.   It often seems that  it is that very disparity between contract and budget target that dooms the modification.

But I think the HAMP exercise is the first time too many homeowners have encountered the idea that housing expense should not overwhelm all other necessary expenses.  Further, that first of all, the mortgage payment is buying housing, not a piece of the Golden State, or arrival in the middle class, or any other abstract value.  It’s a roof over your head, first and foremost.

Have a story tip about foreclosures?

Are you a homeowner who got foreclosed upon AFTER participating in a trial/temporary modification? Are you a current or former loan servicer with inside knowledge of why so many homeowners are being denied modifications and getting foreclosed upon? If so, we want to hear from you.

Please contact NBCNewsInvestigates@nbcuni.com or click on the link below.

Substantive information only; no opinions please.

All you need to do is take one look at a voluminous pooling and servicing agreement on the Security and Exchange Commission’s website to see just how much legalese was used to cover their proverbial back sides.  I took a look at one for a client just the other day and it was over 700 pages long.

One of my favorite pieces to this puzzle is looking at the power point presentation given to the SEC by the Mortgage Bankers Association in 2004.  Take a look at pages 11 and 12 detailing the problems the Mortgage Bankers Association saw and their proposed changes to solve the problems.

Big banks have done such a good job driving up dividends to shareholders by taking control of the market and finding every opportunity for arbitrage that it will take at least a century for the American people to regain any amount of faith in the system.  When debtors and creditors alike are up in arms wondering what has gone wrong, someone or some thing really pulled a fast one on us all.

As consumers try to negotiate this mess, they will believe nothing they are told and resort to good old fashioned sayings I remember my grandfather uttering  like “I don’t trust him as far as I can throw him.”

Of course the courtroom is open to bring these folks to justice one at a time.  But justice is expensive and often as economically wasteful as the tactics used to create the claims.  The bankruptcy court would be as good a venue as any to deal with these issues in turn, providing for a compromise and valuing a homeowner’s property at the market value.  It may not be a complete solution but it sure would get people focusing on what is important again right quick.  And that, my fellow Americans, would buy us all more than any $600 billion bail out ever did.

“We don’t believe the procedural errors in these affidavits led to inappropriate foreclosures,” Gina Proia, a spokeswoman for Ally, says. “We believe the accuracy of the factual loan information contained in the affidavits was not affected by whether or not the signer had personal knowledge of the precise details,” JPMorgan says in a statement.  quoted on MSNBC

Whoa!  I’m interested in the integrity of the process.  Isn’t that the essence of the 5th Amendment to our constitution?   No property shall be taken without due process.

It’s a step down a slippery slope to say, yeah, we swore falsely to facilitate foreclosing on this house but it doesn’t matter.  To whom doesn’t it matter?   And that assumes that the lender’s underlying proposition is correct, that despite not having the note, or verifying what the internal processes report, we are entitled to take your house.

In my bankruptcy practice, I see the junior version of the robo-signing phenomenon, where sworn declarations are filed with the court seeking relief from the automatic stay.  It is clear to me that the person signing them has no personal knowledge of the facts in the declaration:  not only no personal knowledge, but not even a once over familiarity with what’s being signed.  More importantly, a fair number of these sworn declarations are wrong about the payments made, or not made, on the mortgage.

Which brings me to The Big Picture which is soliciting examples of foreclosure errors:

• wrong house,
• wrong loan,
• wrong bank, or
• wrong person.

If you have a personal story to contribute, let’s get it out there and debunk the idea that accuracy and process aren’t important.