Radmilovich.com

If you’ve read my previous posts on this blog, you’ve got a good sense of where I stand on the matter of the current housing crisis. It’s the most massive, shameful, greed-engendered catastrophe one can possibly comprehend. This of course is courtesy of Wall Street investment bankers; apparently, making a lot of money didn’t meet their requirements, rather, accumulating fabulous, unjustifiable personal wealth was of the essence.

My question is, where’s the outrage?

Well, there is outrage but it’s all misplaced. Do not believe that the fault lay solely with your former neighbors who leveraged their homes to dimensions henceforth unparalleled so they could purchase a snowmobile for every member of the family. Yes, they were idiots. But those idiots are gone, homes foreclosed; they’re now living in the mountainless Oklahoma plains.

Direct your outrage where it rightfully belongs: at the banking institutions which were hungry for mortgages to bundle into garbage securities to sell all over the world to uninformed investors. Purported to be “Triple A” grade investments, mind you.

The housing bubble was a function of banks’ willingness to give home loans to any potential borrower who could draw breath. As the originating lenders anticipated they would sell off those mortgages rather than keep them in their own portfolios, they took on no risk and couldn’t have cared less whether those loans would later default. Underwriting became a good joke.

Close to five million borrowers have thus far been kicked out of their homes, another four million probably will be.  In September 2010 the banks foreclosed on 100,000 homes, a record month.  During the past quarter, foreclosure filings were reported on more than 930,000 properties.  HAMP has resulted in only, barely, a half a million permanent loan modifications.

Fannie Mae and Freddie Mac -- you and me, folks; we own ’em -- ultimately will be on the hook for a trillion dollars of debt. And eight trillion dollars worth of homeowner equity -- again, yours and mine -- have been “disappeared,” as they say. Actually, poached.

In Nevada, roughly two-thirds of us or more are underwater, meaning we have negative equity. In fact, the entire state is underwater: if you aggregate all Nevada real estate, the debt against it exceeds its value. Think about that.

In fact Nevada homeowners, chances are you may never have equity in your home again. You’ve been reduced to lifetime renters and your landlord is your bank.

You know the rest: the banks got bailed out with TARP funds, forgiven for their reckless stupidity. Distressed homeowners got HAMP, which, if you’ll read the following post, is an abject, colossal failure. The banks are doing great now, reaping record profits. How are you doing?

Over a year ago the Nevada legislature enacted AB 149 to help distressed borrowers hold on to their homes. I was genuinely, pleasantly surprised, thought it was actually propitious. In essence, it would require a bank to sit down with a borrower to negotiate a modification of the loan in pursuit of attempting to stave off foreclosure of the home.  The problem being addressed was the banks’ theretofore wildly incompetent servicing of the distressed loans.  If you haven’t had to deal with a bank in that context, as all my clients have, let me tell you, the frustration of the ordeal will make you cry. It’s utterly humiliating.

Unfortunately, the mediations, at least every one I’ve attended with a client, have produced far less than whelming results -- much in part to the fact that the banks still can’t get their act together so they don’t come to the mediation prepared to meaningfully negotiate. Banks use incompetence to their advantage in every instance they can and it works -- impressively.

The first at least half-hour of a mediation is comprised of faxing documents (the homeowner’s financial statements, primarily)  to the bank representative in South Carolina who has been provided them according to law serially and well within the time frame prescribed by the Nevada Foreclosure Mediation Rules. But come meeting time, the lady in South Carolina doesn’t have them. The warm bodied bench warmer who actually attends in person on behalf of the bank, many times even a lawyer, has no authority whatever but to dial a phone number and fax documents. The lady in South Carolina, then, has to crunch all the numbers rapid-fire, her ten-minutes of calculation affecting profoundly the life of the homeowner desperate for help.

Many more times than not, the proposal of the bank to modify the loan is so far short of consequential, and take it or leave it at that, that the meeting ends pretty quickly. There is no negotiation in any sense of the word. And that’s it.

The law (AB 149, statutorily NRS Chapter 107) further allows the homeowner to petition the district court for judicial review if she believes the bank did not negotiate at the mediation in good faith. One of the first cases that has been judicially reviewed is synopsized as follows. (For the record, I represented the Petitioner/Homeowner; the Respondent was Wells Fargo though it might have been any of the five big banks that service loans because they all work from the same play book.)

Facts: a mediation was had last March and the bank came to it without bothering to comply with virtually any Foreclosure Mediation Rule. (The Rules were promulgated by the Nevada Supreme Court pursuant to the statute.) One inconsequential proposal to modify the loan was made at the mediation but it was for a temporary period -- that is, it was not a proposal for a permanent modification -- and it had to be approved subsequently by investors who were not present at the mediation. In other words, the representative of the beneficiary did not have the actual authority to negotiate a modification of the loan.

The court held, in sum, that violating the Foreclosure Mediation Rules is never sanctionable, alone. Essentially, ill intent must be proved, as well, for a meaningful sanction to be imposed under the Statute/Rules. If the mediation is only “impaired” by the bank’s failure to comply with the Rules, it gets a slap on the hand and the homeowner gets a slap in the face. In this case the court held that Wells Fargo’s actions impaired the mediation but they did not rise to a level warranting a serious sanction such as a judicially imposed loan modification. The judge merely ordered a second mediation to be held and sanctioned Wells Fargo only $500.00 for the “wasted time” devoted to the first mediation. It also ordered Wells to pay for the statutory fee of the second mediation, $400.00.

Importantly, Wells was not ordered to pay anywhere close to the costs and actual fees the Petitioner incurred for the time and expense to file the petition, attend a status conference and the hearing on the petition (in essence, a mini-trial) or for submitting a post hearing brief pursuant to instruction from the court.

Though the judge found, and the Petitioner proved, that the first mediation was a waste of time insofar as Wells Fargo impaired the process, to get that finding the petition for judicial review had to be filed. After well over a year of uncertainty, which continues, the court awarded a token sanction of $500 to the Petitioner to basically get back to square one. This will most certainly discourage lawyers from helping homeowners henceforth -- no attorney can afford to represent a client for what amounts to tens of dollars per hour -- and will do nothing to deter banks from treating homeowners reprehensively.

One: let’s face it, Wells Fargo ignored every requirement of the Rules and it did so with impunity -- because these are only “technical” “shortcomings.” It doesn’t matter that the banks have flouted the Rules from the get-go and that they rarely ever abide them. (Not once have I participated in a mediation in which a bank complied with virtually any of the requisites.)  So, as made plain by the court, ignoring the Rules that require that mortgage documentation be adequately authenticated; that methodologies used by the bank to determine what an offer for a loan modification was based on or why a bank determined that a borrower didn’t qualify under HAMP; providing a confidential proposal to the mediator prior to the mediation, etc., doesn’t equate to bad faith or, necessarily, the lack of good faith. These violations are not sanctionable, or at least not meaningfully so, and only considered when other evidence showing ill intent is present. Flouting the law doesn’t matter; ill intent must be shown, a high order particularly in this context where there is no opportunity to conduct significant discovery to evidence that intent. It’s on par with proving fraud, virtually impossible.

Is not the intent of a bank to defeat borrowers by calculated ineptitude bad faith, which can be defined as “a neglect or refusal to fulfill some duty . . . , not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive?”  Black’s Law Dictionary

The banks have used ineptitude and neglect up and down the chain to excuse themselves of responsibility:

(1) in originating loans, by gutting underwriting and rendering supporting documentation unnecessary (e.g., “stated income” loans) so banks could lend to manifestly under-qualified borrowers in order to feed the mongers of mortgage-backed securities and collateral debt obligations;

(2) in servicing loans and playing the game of appearing to negotiate offers for loan modifications under HAMP or under their own unknowable, internal equations and throwing away or misplacing original documentation;

(3) in providing such profoundly incompetent loan servicing that borrowers are left humiliated, heart-broken and at their wit’s end;

(4) and now, in playing dumb and unable to comply with state Statute/Rules because, they claim, they don’t have the capacity to keep up with the numbers of distressed borrowers who are distressed because banks’ greed cratered the housing market in the first place.

The only process the banks have streamlined is foreclosing on distressed borrowers who should be able to keep their homes; it helps if there’s no accountability whatsoever.

To the court’s credit, Wells Fargo was sent a message: “Because Wells Fargo’s conduct resulted in a mediation that cannot be held to be in good faith, this Court finds a second mediation to be prudent. With Wells Fargo admonished as to the importance of comporting with the technical requirements, this Court is confident that the next mediation will be conducted in the best of faith and that whatever result occurs, such result will be sufficient to resolve this action.”

Wells Fargo did not get the message. At the second mediation, not only did the bank fail to comply with any of the technical requirements, it offered no modification proposal whatsoever.

Let's go back to outrage.  Had we -- taxpayers and homeowners -- not provided billions of dollars to keep these banks afloat, they would have been, in a sense, foreclosed.  Now, where's the reciprocity?  You know why distressed borrowers don't get meaningful loan modifications?  Because, in abject bank hypocrisy, they constitute a "moral hazard."   Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk. 

            Who says irony is dead? 

            I'm outraged and you should be.  A dead-on observation from a recent Rolling Stone article (Matt Taibbi) explains this irony: "[I]n America, it's far more shameful to owe money than it is to steal it."  The head of the Nevada Bankers’ Association sociopathically believes the Foreclosure Mediation Program is doing its job by merely giving borrowers a forum to tell their “tales of woe.”  My concern is that that’s precisely what the Program has been reduced to and that the banks have won -- or nearly killed AB 149 -– they can as a practical matter do what they please without the fear of sanctions.  When AB 149 was enacted, there was hope that the legislation would finally push banks to take loan modifications seriously.   The fact of the matter is, banks make more money foreclosing on homeowners. Period. They have no incentive to modify loans that actually make economic sense.  As is it, banks will continue dumping inventory on the market; market value will continue to free-fall indefinitely; and anyone who owns a home, whether they be a distressed borrower or not, will continue to bleed.  Far into the future.

            I own a home which is worth just about what I paid for it in 1998, down 60% in value since 2006.  Where did my roughly $100,000 in equity go?  It bought many, many snowmobiles.