Foreclosure Fairness Act

Since the recent economic crisis began in 2008, banks and the federal government have promised homeowners assistance with mortgage modifications, short sales, and other relief designed to assist with defaulted mortgages.  The federal government passed the Home Affordable Modification Program (H.A.M.P.).  Banks have repeatedly assured consumers and the government that the banks are working to help homeowners avoid foreclosure.  However, using any rational measurement, the program has been a complete failure.  In fact, foreclosures are at an all time high and Americans are losing their homes at a record pace.

Finally, there is help.  On July 22, 2011, the State of Washington passed a new statute entitled the Foreclosure Fairness Act.  Under the act, instead of playing endless games of phone-tag and paperwork games with lenders, homeowners now have the right to demand mediation. 

The greatest aspects of the mediation program are:

  1. The foreclosure sale is stopped;
  2. The bank must produce an authorized agent with authority to modify the mortgage, or take whatever action is reasonable to assist the homeowner;
  3. The bank must disclose the mysterious Net Present Value calculation prior to mediation;
  4. The bank must negotiate in good faith; AND
  5. Failure to negotiate in good faith is deemed an unfair business practice in violation of our State Consumer Protection Act. 

Therefore, if a homeowner submits an application for mediation, the bank must produce an authorized agent to appear at the mediation.  That authorized agent must have the authority to modify the mortgage, authorize a short sale, etc.  Not only should this bring an end to the phone-tag and paperwork games, but it will likely result in modifications and short sales succeeding where others have failed.

The absolute greatest part about the program is that although an attorney or certified housing counselor must submit the application for mediation, the homeowner can elect to self-represent at the mediation, or even designate a non-lawyer to represent at the mediation hearing.

This program will be an invaluable tool to homeowners attempting to modify a defaulted mortgage.  This program will be even more beneficial to those attempting to obtain more time and more favorable terms to conduct a short sale.

If you have any questions concerning this program, do not hesitate to contact the Department of Commerce, or my office.

 

PURPOSE

The Foreclosure Fairness Act was enacted to address the H.A.M.P. program’s weaknesses.  The reasons for the H.A.M.P. failure are simple.  First, the H.A.M.P. program contains surprisingly few consequences for banks that refuse to cooperate with program guidelines.  Second, banks have surprisingly few incentives for participating in the programs. 

Essentially, all the banks did in response to H.A.M.P. was to create a paper mill under which modification applications are “lost” or denied for unexplained reasons.  Many modification applications have been denied based on a mysterious “Net Present Value” figure.  However, banks have never been required to disclose the elements of the Net Present Value formula.  Additionally, short sales have been even more difficult to explain.  Banks have developed a policy of dragging their collective feet and rejecting valid short sale offers from qualified purchasers.

 

EXAMPLES

In Washington, a homeowner recently submitted her fifth modification application, which was eventually rejected because she did not make enough money.  The bank rejected the modification because her income fell short by $44 per month.  That is right!  The difference between modification and foreclosure was $44 per month.

Even more shocking was a recent short sale case.  In that case, the BPO was $105,000.  The homeowner was able to obtain 4 offers from qualified purchasers at $105,000.  The bank rejected all offers and stated that it would not accept anything less than $111,000.  The short sales fell through.  The bank then sold the home at foreclosure auction for $98,000.  That is right!  The bank rejected a short sale offer of $105,000 in favor of selling the home for $98,000.  The bank intentionally threw away $7,000 to foreclose rather than conduct a short sale. 

 

THE DIFFERENCE MAKER

Washington’s Foreclosure Fairness Act contains consequences that may actually convince banks to modify mortgages or engage in short sales rather than playing the phone-tag and paper mill games and opting for foreclosure.  Failure to negotiate in good faith not only prevents the bank from foreclosing, but it is also a violation of the Washington State Consumer Protection Act.  To be certain, if the above examples had occurred under this mediation program, the banks would now be answering to a judge for their bad faith actions, the banks would not be able to foreclose on those homes, and the homeowners may receive damages for their troubles.