In the not-too-distant past, mortgages were made through local banks where borrowers and lenders had personal relationships. If there were problems, they could be worked out. Then came the banking bust of the 1980s. Banks quickly learned that selling mortgages to servicing companies made big money. Soon after, lending requirements were eased to promote home ownership
Now half of all mortgages are held by a servicing company. Those companies don’t make much money on borrowers who pay on time. They make money off fees paid by borrowers in default. The service company therefore has a large interest in keeping borrowers in debt.
“The longer they can hold people in default, the more money they can make,” says attorney William F. Jaworski Jr. “People in default are thrown into an abyss.”
Jaworski specializes in personal bankruptcy and foreclosures, which makes up about 75 percent of his practice. Before the mortgage crisis of 2008, he saw mostly low-income people in dire straits. Since the crisis, the difficulties have shifted to the people of moderate and moderately high income. In some cases, those in trouble borrowed more than they could afford. In others, people made investments in real estate that went bad. Because those in default often try to pay their mortgages with credit cards, other types of debt mount, too. That’s great for the financial industry, a disaster for the consumer.
Jaworski often helps clients through Chapter 13 bankruptcy declarations, which allow people to reduce their debt through payment programs. Several federal programs for mortgage modification have been advanced, “but they’ve been viewed largely as failures,” Jaworski says. Because the agreements between lenders and servicing companies favor the servicing companies, “the incentives to keep people in default are still greater than the reward of modification.” A new law in Delaware requires foreclosure claims to be mediated through Superior Court, but it’s too soon to gauge the law’s success.
“The history is that the financial companies can’t be trusted,” Jaworski says. “In bankruptcy cases, you have to review foreclosure claims very carefully,” and those reviews often reveal questionable fees. “My hope is that they go back to traditional standards,” which include specific down payments and strict income-debt ratios. “At first that was the case, but it’s going back again,” Jaworski says. “Eventually there will be another financial crisis, another foreclosure crisis.”
Jaworski believes there should be greater regulation of the industry, but he doubts that will come to be. The National Association of Consumer Bankruptcy Attorneys has proposed federal legislation that would allow bankruptcy judges to temporarily modify mortgages to pay down principle, then rewrite the mortgage in five years. “That would create equity quickly and keep people in their homes, which stabilizes communities,” Jaworski says, but he doubts the bill will be passed during an election year. “Generally speaking, the system is broken.”
The good news is that “bankruptcy isn’t the end of the world,” Jaworski says. Good personal financial management can help people improve credit scores quickly. The key is to seek help as soon as possible. Department of Housing and Urban Development counselors have done a good job of negotiating modified mortgages for clients. In more dire cases, Chapter 13 declarations can stop a foreclosure.
“The earlier you seek help,” Jaworski says, “the easier it is to get help.”