Homeowners Strike Back at the Banks

04/05/2010 11:25 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

The past few weeks we’ve seen another round of headlines about mortgage modification programs from the banks and the federal government. The sad fact is that all of these programs have failed—not for lack of good intentions, but because of the lack of real incentives combined with the huge, untrained bureaucracy involved in the process.

The stories of desperate homeowners are heart-rending. Despite their best efforts, far too many homeowners are caught in a never-ending cycle of paperwork and red tape as they try to avoid foreclosure on the family home.

Many homeowners try to maintain their good credit, but are told they must be two or three months late on payment before the lender will even talk to them about a modification. They comply and then are told that their credit is too bad for a chance at a refinancing. 

They send in paperwork only to find it lost. They place phone call to “help lines” only to wind up speaking to an automaton in India named Larry.

Many are told to send in lower monthly payments for a “trial” modification—only to be lost in the system. In fact, some receive foreclosure notices because the bank department that is accepting their lower payments never contacted the bank department that is pursuing foreclosure.

Now, the balance is shifting. Desperate homeowners are striking back. They’re hiring lawyers to dispute the terms of the original loans, to challenge the paperwork, and to delay the process. 

One attorney who specializes in this kind of work told me: “I sit across from them and I tell them I can’t guarantee anything, and neither can any attorney. But I also tell them that if you do nothing, you will lose your home. That’s a fact... As a homeowner, you do have rights, but most people don’t have any idea these strategies exist.”

While most attorneys charge a monthly fee and may also charge a contingency of 20% of any principal reduction on a modified mortgage, the cost may be worth it.

First, the monthly lawyer’s fee is usually well below the amount the homeowner was supposed to be paying on the mortgage. So, the legal tactics allow homeowners to stay in their home longer at less cost while they look for a new job or simply save money for an eventual move. And if there is a modification, the legal fees may be far less than the cost of moving!

The key for these attorneys is to research all the loan documents—not only the mortgage contract, but the application, the various forms, the “good-faith disclosure” and other documents.

Since so many loans have been sold, resold, and passed on to new servicing companies, it may not be possible to find the original note. That in itself can be grounds for delaying a foreclosure, and it can become hugely annoying to the attorneys hired by the bank to pursue the foreclosure.

And that’s exactly the point: to become such a pain to the bank’s attorneys that they’ll find it easier to do a modification than pursue the foreclosure.

It’s not pretty to think of using this kind of tactic when you really wanted to pay off your mortgage and were only asking for some kind of sensible resolution with the bank. 

But remember the old saying: “Fight fire with fire.” Banks are hiding behind incompetent people who answer the phone intermittently, systems that lose the paperwork, astoundingly contradictory responses, and hired lawyers who are compensated only if they push you through to foreclosure. 

Now it’s time for homeowners to fight back using the legal system that has, until now, worked against them. It’s time to stop calling, stop pleading, stop crying, and hire an advocate who can at least speak the only language banks respond to—litigation.

Maybe then the banks will pay attention instead of just giving lip service to the idea of customer service.

What do you think? Please join the conversation and have your say.

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