Kelly: The stigma of foreclosure lifts as lenders alienate borrowers

Our nephew, a high school teacher and coach in Southern California, decided to stop paying on his mortgage a year ago.

Matt, 34, is still in the home.

I thought about him the other day when I read that foreclosures are taking longer to complete, with the average time it takes a lender to repossess a home jumping to 477 days, up from 414 days in the fourth quarter of 2012. The new number represents the longest average foreclosure timeline that RealtyTrac, the company that specializes in foreclosure statistics, had ever recorded. 

How did we get here? Given the run-up in values before 2007, appreciation floated all boats. Many consumers bought more house than they could afford and lenders were too eager to help them do it. When things headed south, there were not enough genuine lender efforts to renegotiate loans when they were first in danger of default.

“I was really concerned about doing the right thing,” Matt said. “It (stopping payments) was the toughest thing I’d ever done. There were tears, sleepless nights and family quarrels. We felt we gave it our best shot but got absolutely no help from the lender.”

The three-bedroom home they’d purchased four years ago in a huge subdivision had plunged in value. While their hefty monthly mortgage payment was a stretch from the outset, the family had researched schools and churches in the area and decided this was the neighborhood for them. His wife took a job as a substitute teacher to help make ends meet.

“We never missed a payment,” Matt said. “When rates dropped under 4 percent, we approached the bank about lowering our interest rate. We read about what other lenders were doing for owners who were behind and in financial trouble because of the economy. I realized that we probably wouldn’t ever get what we paid for the house, but our bank still said there was nothing it could do for us.”

Fast forward nine months and two more written attempts to the bank to reduce the interest rate. Still, no help from the bank.

“I spoke to an attorney who told me I probably wouldn’t get any response until I was behind on my loan,” Matt said. “That seemed crazy. Other people were getting bailed out, but I just wanted a lower rate. Seriously, I didn’t want to hurt my credit by getting behind, but there were larger homes in our neighborhood we could rent for half of what we were paying on a mortgage.”

Matt decided to stop paying the mortgage and become a “strategic defaulter” – a borrower who could make payments but decided against doing so. After four months, he got the lender’s attention but he was so soured by the bank’s lack of communication and unwillingness to listen that he decided to stay in the house until it was repossessed. Obviously, he is not alone.

“The stigma of going through a foreclosure is lifting,” said Rob Crichton, real estate attorney. “There is a change in the public attitude toward banks in general. A lot of people are so far under water that they are pulling the plug and living free for a year, or whatever.”

Crichton pointed to a news article that indicated that if the state of New York attempted to process all of its foreclosures, it would take 30 years to do so. That’s because New York is a “judicial” foreclosure state, which requires a court procedure. Non-judicial foreclosure states (like Washington) require no court intervention. The massive bottleneck has brought mandatory mediation in many states.

Meanwhile, the Office of the Inspector General at the Federal Housing Finance Agency announced it is trying to find strategic defaulters and collect on what they still owe. The OIG says such walkaways have constituted mortgage fraud, and the OIG plans to refer them for criminal prosecution. 

Experian, one of the three large credit bureaus, has estimated that 20 percent of all foreclosures are from strategic defaulters. The OIG estimates that strategic defaulters owe more than $1 billion to Fannie Mae and Freddie Mac, and they’re ready to start collecting. 

 “We’re not just going to demand repayment,” Heather Wolfe, OIG assistant inspector general for audits, was quoted as saying. “We’re going to lock (people) up.”

Perhaps the OIG’s efforts to prosecute should be in direct proportion to the lender’s efforts to reach an earlier compromise with the borrower. After all, didn’t the country recently bail out the banking industry?