Disclaimer: I’m a paralegal, not an attorney and cannot give you legal advice. Nothing on this website is meant to be legal advice, and there is no guarantee that the information on my blog will work for your individual situation. Please consult with an attorney if you have questions about your individual situation.
If you're new here, welcome! My name is Christine, and I help people by analyzing their mortgage and foreclosure documents to find the errors, loopholes and mistakes made by the banks.
By the way, if you are looking for resources to audit your own loan, please check out my workbook, DIY Mortgage Review for Homeowners on my media site.
In this post, I want to talk about loan modifications ("loan mods") and short sales during the Great Recession ("TGR"). I mentioned in yesterday's post that the incentives related to foreclosure are different than during TGR.
The TGR kicked off when subprime lending crashed on April 7, 2007. I remember that day, because the condo that I had just closed on the week prior lost about $100,000 in value overnight.
Much like we're seeing with the narrative about people going back into an office, the narrative in the media at that time was about "deadbeat homeowners who want a free house." This was largely intended to shame average Americans for not making their house payment, even though average Americans didn't create the subprime lending bubble.
I blogged all through TGR and this narrative was pervasive. It actually did a good job of influencing public opinion that everyone who was in foreclosure borrowed too much money and now they couldn't pay for it.
The reality is that most people did NOT do that.
And even if they had, why didn't the bank do a better job of ensuring people could repay the loan?
The answer to this is because these loans were VERY profitable and there was a lot of demand for these loans. Whenever interest rates are low, investors are likely to look for other ways to get a higher return on their investment. Subprime loans were an attractive investment because they paid a higher return. Subprime borrowers were charged higher interest rates because of their credit scores.
However, many people got steered into an adjustable rate mortgage when they had perfectly good credit. Most people didn't know how adjustable rate mortgages worked or even that they were getting one, instead of the traditional 30 year fixed interest rate loan.
They were pushed into these loans because brokers made a lot of money through the Yield Spread Premium (illegal now) where the banks gave money to the broker for placing people into higher interest loans. There were some other incentives, too, not just the YSP.
The investor demand for these exotic loans was so great that they were buying off mortgage brokers with commissions taken out of the profit created through the higher interest rates. Unbelievable!
The other thing is, banks weren't even loaning their own money! They were loaning money from investors, pension funds and institutional retirement funds.
The pool was created by filing the securities paperwork with the Securities and Exchange Commission. Part of this was the prospectus and the Pooling and Servicing Agreement. Many were backed Freddie Mac and Fannie Mae, but not all of them.
The banks made a lot of money from fees during the origination of these loans, and also their servicing fees for administration of these loans. When the loans went into foreclosure, they received fees for inspections, attorneys, and more.
As the economy got worse, things eventually got so bad that there were few people who escaped without any damage. Many people never recovered after TGR. Wages stagnated and interest rates were kept very low for nearly a decade which made borrowing costs almost nothing. Corporations were hoarding cash and refusing to raise wages for employees.
People absolutely made decisions based on their incentives at the time. For example, in Arizona, there is no deficiency law. By that, I mean the bank cannot sue you for the difference between your loan balance and the amount they are able to get for the property in a foreclosure sale.
I saw a lot of people who decided to walk away. I knew several people who walked away and mailed their keys back to the servicer. I knew people who lived in the home until the foreclosure sale and then left. I knew couples who intentionally put the loan in one spouse's name so only one them had trashed credit, and the other spouse applied for a loan in their name only.
I also saw many people who went through loan mod hell, was an extended process of the bank misleading people about considering them for loan modifications. The banks routinely lost paperwork and asked for it repeated times, and eventually they started dual tracking people so they'd be in the loan mod process while the foreclosure process was moving forward.
At some point, it became obvious that most people were not going to get approved for loan modifications, which led to the Making Home Affordable (MHA) and Home Affordable Modification Program (HAMP). These were programs that the government told the banks to comply with, but had no legal recourse for homeowners to sue the banks for non-compliance.
There was a calculation called Net Present Value (NPV) that was used in figuring out whether someone was going to get a modification.
My personal opinion was that there was MUCH more going on behind the scenes. The banks had financial incentives for keeping the loan modification dragging on and on, probably because it could collect servicing fees. These are a LOT of money in foreclosure.
My personal opinion is that they were also making decisions based on earnings, and not just whether you had a job. The only people I saw getting approved for mods and short sales were people who were high earners.
On the one hand, this made sense. If you can't pay for the house, then why bother with the loan modification? On the other hand, TGR was obviously such a broad economic impact on everyone that it seemed more appropriate to approve people unless they had a compelling reason not to do so.
I saw just TWO people I knew personally get short sales approved, and I suspect that is because they were high earners.
I personally thought (and still do) think short sales offer no benefits to homeowners. If you want to keep the house, then lawyer up and sue them for it.
Don't do them any favors when they don't give a shit about you. Not only that, but they created TGR and made a lot of money stealing people's homes.
Additionally, the homeowner is still going to take the hit on your credit report in a short sale. However, if you decide to sue the bank, you can negotiate what they report to the credit reporting agencies.
My theory on why the high earners got short sales was that these people actually had the future potential to need the bank's brokerage services or another loan in the future.
I frankly think the bank did not see most Americans as ever being able to qualify for a loan again in the future. This makes a lot of sense in light of what just happened with the pandemic.
It does look to me like TGR was part of an overall agenda. I am generally not a conspiracy theorist. However, any intelligent thinking person can look back at what happened, especially taken together with the pandemic, and acknowledge that something isn't right.
Aside from that, two MAJOR economic disruptions in under 20 years means there's probably a decade of lost earning wages and growth for many people, which makes a huge difference in retirement.
We usually think of having a house and two cars as the American dream, but the truth is that the Boomer generation is the only generation to experience uninterrupted economic growth and stability during their earning years. They also had jobs, pensions, retirement programs and good wages.
I think they are the exception. No other generation currently alive on this planet has or will have that kind of uninterrupted economic growth.