Posted on Friday, September 25, 2009
Proposals pending in Florida, one of the hardest hit states, reflect the problem at the foundation of our crisis; who should be responsible for bad buying and lending decisions? How should we allocate the risk of bad decisions?
The second proposal, titled the "Foreclosure Bill of Rights," would prevent a lender from getting a final judgement or moving forward with a default judgement until they comply with the law's requirements. The law would require lenders to produce a new appraisal and more or less all of the original loan documents (or prove that they tried to obtain them). The borrower would have to produce 3 year's tax returns and 3 month's bank statements. The parties would have to show that they tried to mediate the matter. So far, except for the fact that this will add considerable delay to the forelcosure process, not so bad. But here's where this new proposal gets insane; the court would decide whether or not the parties (the bank in paticular) truely made a good faith effort to mediate and this would include RENEGOTIATING THE LOAN AT A PRINCIPAL EQUIVALENT TO THE ACTUAL MARKET VALUE. Among the considerations will be the income, savings and other asets the borrower has - so essentially someone who spends every penny they make and does a bad job saving may get a better deal on their loan work out than a more prudent borrower. Once again, the proposal is that judges will decide whether a loan is commercially reasonable. Remind me again, when did judges beconme experts in commercial business matters of this nature? The good news is the proposal provides for a "forbearance lien" equal to the difference between the original principal and the new principal. The bank would be paid the proceeds from the first resale, refiance or transfer over the renegotiated loan balance. Uopn a subsequent sale, etc the lienholder would potentially receive further funds.
One thing's for sure, we can expect a rash of new forelcosure filings as banks scurry to get in under the deadline if this proposal passes.
And theres no way banks are going to hold on to these forbearance liens forever. My guess is they'll be sold to aggressive collections companies and these borrowers will find themselves moving from the frying plan into the fire.