Loophole in mortgage settlement means lenders continue foreclosures

So the $25 billion mortgage settlement deal that was supposed to help keep people in their homes? Turns out banks have found a loophole: They’re forgiving second mortgages while refusing to modify the primary mortgage.

Quick recap: Lenders were found to have forged documents, falsified signatures, and otherwise broken the law in an effort to foreclose on people as quickly as possible. As part of the settlements reached for doing that, they were required to use billions to forgive mortgages and help people stay in their homes.

Here’s the loophole, as the New York Times explains: Banks get credit for forgiving either first or second mortgages, so they’re choosing to forgive the second loans (which, in a short sale or foreclosure, would be worthless anyway).

So a lender can forgive a second mortgage — which in the event of foreclosure would be worthless anyway — and under the settlement claim credits for “modifying” the mortgage, while at the same time it or another bank forecloses on the first loan. The upshot, of course, is that the people the settlement was designed to protect keep losing their homes.

The five banks covered under last year’s settlement are wiping out second mortgages in record numbers. 

The result: Thanks to this loophole, foreclosures continue apace. People are still losing their homes, and property values are continuing to be held down by distressed properties on the market.

Read the details from the Times.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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One Response to Loophole in mortgage settlement means lenders continue foreclosures

  1. Wayne says:

    Not sure I agree with this being a bad thing. Wiping out the second loan saves the owner hundreds on their monthly mortgage like a modification would and it allows them to emerge from being underwater much sooner. In the case of the 100% loans that second trust could be 20% of the total amount originally borrowed. So I don’t see this as a bad thing. Too many folks forget that they borrowed money from the bank to buy a house, they didn’t buy the house from the bank so the bank is not responsible for the drop in prices. People choose to use the money to secure their dream and need to be responsible for the debt they took on in pursuit of their dream. We’ve become a nation of irresponsible adults who want a bail out without consequence when we make a mistake. If it’s really that bad for you financially file bankruptcy and start over instead of holding on to the ship that’s going under. So on this article I’m looking at the other side, yes the second loan would be worthless in a foreclosure but if they wipe them out and it makes the home affordable for the current owner how can that be a bad thing? If wiping out a 20% second trust doesn’t make the home affordable to the current owner even at previous interest rates then face reality, you can not afford that home it’s time to short sale and move on with life.

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