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Mediation for the Defaulting Homeowner


     By Forster Realty Advisors Real Estate, Mortgage Litigation Consultant and Expert Witness

PhoneCall Eric Forster at (424) 284-1800


As long as home prices continued to increase at a blinding rate, there was no reason for the lenders to worry about the security for the loan they approved and funded. Now, in a very different market environment, they find themselves facing mass defaults on loans and very angry homeowners who say that the loan underwriters deceived them when they allowed them to purchase homes for which they were clearly unqualified.
With the collapse of the sub-prime mortgage market due to unprecedented loan defaults, bankers and housing industry experts expect a snowballing effect which could have a lasting effect on the economy as a whole. Already, we are seeing foreclosure statistics which are the highest in a generation, and there is no light as yet at the end of the tunnel.

Typically, a loan default is covered by existing laws dealing with secured properties. A default on a car loan translates into an almost immediate repossession, while a mortgage default can lead to either a judicial foreclosure or to a trustee’s sale (in Trust Deed states). The process is well-trodden and almost never calls for mediation between the lender and the homeowner. This time, I believe that there is a need for a third-party intervention before the homeowner loses his/her home.

In 1999, at the top of the tech bubble, then-Fed chairman Alan Greenspan described the stock market as going through “irrational exuberance.” A year later, a new bubble was formed, this time in the housing industry. Until that bubble burst in 2006, it seemed that sellers, buyers, realtors and lenders all expected real estate prices to continue to appreciate at rates of 20-30% per year, seemingly endlessly. It was during that time that many loan underwriters abdicated their responsibilities and began to approve loans, as the saying in the industry went, “for anyone who had a pulse.”

As long as home prices continued to increase at a blinding rate, there was no reason for the lenders to worry about the security for the loan they approved and funded. Now, in a very different market environment, they find themselves facing mass defaults on loans and very angry homeowners who say that the loan underwriters deceived them when they allowed them to purchase homes for which they were clearly unqualified.

Mediating the opposing interests of the bank and the homeowner would allow for a win-win proposition, where the homeowner could possibly get to keep his mortgage - and the home - using either a temporary debt relief or a change in the rate and the terms of the mortgage. The lender would avoid “buying back” a defaulted loan and the need to increase their regulatory reserve requirement. In previous housing downturns the foreclosed homeowner had little if any recourse, while this time, real estate attorneys foresee tens of thousands of homeowner lawsuits targeting lenders who’ve burdened them with financing they could ill-afford, let alone qualify for.

The sub-prime mortgage crisis is different from the last one lenders faced - that in the aftermath of Hurricane Katrina and the devastation visited on New Orleans and parts of Mississippi and Alabama. Katrina rendered thousands of homes uninhabitable and owners temporarily or permanently relocated. Most lenders there responded to the disaster by placing a moratorium on the mortgage payments and by working through and with the insurance companies.

ABOUT THE AUTHOR: Eric Forster
In his three decades in the Real Estate and Mortgage industries, Eric Forster has originated, processed and underwritten residential and commercial mortgages, and has been qualified as an expert witness by federal and state courts.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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