I read yesterday with equal parts fascination, amusement and horror of a man in Florida who had wrongly had his house go through foreclosure proceedings. He had bought the home with cash and had no loan against it. To be foreclosed upon in such circumstances is the height of absurdity. The Bank in question made a clerical mistake by pursuing the foreclosure and then compounded their error by not compensating the man for the minimal reimbursement he asked for when he defended himself in court. (He won, of course). After repeated attempts to collect the reimbursement monies he asked for, he eventually turned the tables on the Bank itself and pursued foreclosure against one of their Branches. I have no idea how he was able to work his way through the myriad of legal obstacles, but at one point a Bank in Florida found themselves surrounded by a moving van and deputies with orders to foreclose. This is the stuff of legend.
About a week ago I read an article in the Oregonian about families attempting to renegotiate their existing loans with their Banks. This process, known as a modification, is one in which consumers are able to obtain a reduced payment by modifying the terms of their existing loan. Their loan is not paid off, but instead, it is changed and the consumer receives a lower payment with the hope they will then be able to afford to stay in their homes. From what I could gather from the article, during the time the modification is being considered the Bank is pursuing a foreclosure simultaneously. This is truly a recipe for disaster.
I have really mixed feelings about modifications. First and foremost, they are approved or denied for reasons that appear random at best and somewhat dubious overall. In many cases, consumers are encouraged to miss payments in order to prove their need of the modification. By doing so, the customer puts themself at risk of default and ruins their credit in the process. From what I understand, if a customer is “lucky” they are given a trial modification during which they make a payment lower than their normal payment. If the modification becomes permanent, the lower payment becomes their new payment. If the trial modification is declined, they are expected to pay for the difference between the lower payment and their regular payment and any accrued fees or expenses along with it. Once again, this is a recipe for disaster.
We live in very strange times. The fact that Banks are expected to modify the terms of a loan should raise eyebrows in and of itself. What consumers and consumer groups need to realize is that modifications are voluntary on the part of a Bank and will only be approved if the Bank feels it is in the best interest of the Bank. Perhaps this is why the process seems so completely chaotic and illogical to most consumers.
I expect that we will continue to see a few strange headlines over the course of the next few years as modifications, foreclosures and short sales work their way through the system. I hope that at some point these terms aren’t what we think of any longer when it comes to the housing market.