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Banks can relieve mortgage crisis by giving homeowners a break

With foreclosure rates at unprecedented levels, it may be time for banks to stop applying one-size-fits-all policies and work with homeowners to keep them in their homes.

June 25, 2010|David Lazarus

At what point do banks finally throw in the towel and accept that they've got to reduce people's mortgages if they want to ease the foreclosure crisis?

A record 1 out of every 10 homeowners nationwide was at least 90 days behind on home payments during the first three months of the year, up from 1 in 14 a year ago, according to the Mortgage Bankers Assn.

The Inland Empire remains especially hard hit. In May, 1 in 106 homes had a foreclosure filing on it, according to market research firm RealtyTrac. A separate study by CoreLogic found that nearly 18% of homes in the area were at least 90 days late on mortgage payments in March.

And then there's the case of Charisse Hogan, whose Fontana house is so far underwater, the amount owed — about $450,000 on two loans — is nearly three times what local real estate agents say the home is now worth.

Hogan, 41, is in a unique situation. The three-bedroom house is only in her husband's name. When he died in an auto accident in December 2008, she inherited none of his mortgage obligations.

She could walk away at any time, no harm, no foul, and leave the mortgage lender, Bank of America, holding the bag.

But Hogan doesn't want to do that. She wants to stay in the house, keep her family rooted, leave the property one day to her two kids. She just wants a mortgage that reflects the home's actual value, which comparable properties in the area indicate is about $175,000.

Has BofA even been willing to haggle? Apparently not. The bank alerted Hogan recently that it planned to place the home up for auction July 6.

"It makes no sense," said Richard Ball, a retired Calabasas businessman who heard about Hogan's situation from a friend and has been trying to help work out a deal with the bank.

"They want to toss out someone who wants to live there and wants to make monthly payments at market value," he said. "And instead of letting her do that, they want to sell it to someone else for about the same amount of money as she wants to pay — if they can."

This is a tricky landscape, I know. There are many people in Southern California and elsewhere who got in over their heads through reckless behavior or irresponsible decisions, and it's unfair to reward them by giving them a break on their loans.

But there are many others who find themselves in distress because of circumstances beyond their control. Maybe they lost a job. Maybe they were misled by an unscrupulous lender. Maybe, like Hogan, they inherited their troubles from someone else.

Breaks of the game, you could say. But with foreclosure rates at unprecedented levels, and with a broader economic recovery hinging on a turnaround in the housing market, isn't there a point where it can reasonably be asked whether banks shouldn't be doing more to keep people in their homes, even if that means taking a bath on some loans?

"Of course, that would be the right thing," said Christopher Thornberg, a principal at forecasting firm Beacon Economics. "But it would be like asking an oil tanker to make a sharp turn. You couldn't get the banks to do it."

He pointed out that big banks aren't designed to make individual decisions for individual clients. Instead, they follow one-size-fits-all corporate policies. And if that means you keep foreclosing on people's homes, so be it.

I'm not saying Hogan doesn't deserve to be thrown out of her house. She does. After her husband died, she made a modest effort to contact BofA and sort things out, but she quickly found herself lost in a bewildering sea of paperwork and financial requirements.

So Hogan, a hairstylist, turned a blind eye to the problem. She stopped making mortgage payments and has enjoyed a free place to live for the last year and a half, courtesy of BofA. She hoped the bank would eventually contact her with a plan to allow her to take over the deed.

"They never called back," Hogan told me. "So I didn't pay them anything."

Was that the wisest thing to do?

"Maybe not," she said. "I don't know."

Ball, the retired businessman, said he realized after stepping in to help that Hogan had no wherewithal to deal with a situation like this. "She just doesn't understand this stuff," he said.

Again, that's no excuse. We all agree on that.

But is the solution really to foreclose on yet another house and force yet another family to move out? At the very least, wouldn't it make more sense to postpone the auction and see if there isn't another approach?

In March, BofA announced a plan to cut qualifying mortgages by as much as 30% to lower monthly payments for homeowners facing foreclosure.

The program applies only to loans from Countrywide Financial, which the bank acquired in 2008, and for loans that are behind in payments and are for more than twice a home's estimated value.

Hogan's loan was with Countrywide and thus may qualify on all counts. But even though BofA said it would contact qualifying homeowners, it never called Hogan — maybe because the homeowner of record in this case was dead.

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