Should We Foreclose On Grandma?

December 3, 2012 at 6:44 am 1 comment

imagesCAENU2IPThere are two villains behind the financial crisis:  one is banking institutions, which abdicated their responsibility to underwrite loans and then ran to Congress to advocate for a $1 trillion bailout in the name of preserving capitalism, and the other is the American consumer, who, despite what their advocates and the CFPB like to think, knowingly took on debt they could not afford.  The most frustrating thing about the aftermath of this crisis has been continuing banker hubris in failing to acknowledge that they need to change their ways and political timidity in telling the American public that it needs to hold itself responsible for the part it played in the meltdown.

The latest nominee for a solution in search of a problem comes from the New York Times with help from the American Association of Retired People (AARP).  According to a front-page article in yesterday’s times:

In the latest chapter of the foreclosure crisis, homeowners over 50 are falling into foreclosure at the fastest pace of any age group, according to nationwide data, in part because women are outliving their spouses and are unable to cope with cuts in their pensions, ballooning medical costs — and the fine print on their mortgages.

So what is this fine print which is ensnaring Golden Girls all across America? According to the Times, “[t]o stay in the home, the surviving spouse needs to take over the mortgage. But to do that, most banks require that the borrower assuming the mortgage be up-to-date on payments.  Housing advocates say that their clients, especially if one spouse experienced a prolonged illness, often find they are already thousands of dollars behind.”  The fine print to which the Times is referring seems to be that nettlesome detail of who signed the mortgage note and whether the surviving spouse can actually pay off the remaining debt.

Here is why the article is so misguided.

I’ve dealt with credit unions that have looked the other way after a member has passed away and, at the risk of sounding like a cruel and heartless lawyer, it is a bad idea.  Death constitutes default on most mortgage contracts because no one else can be compelled to take over a loan or presumed to be financially able to do so.   A mortgage note is not a technicality.  A financial institution has no more right to demand payment from a spouse not on a note than it would to demand payment from a total stranger on the street.  A financial institution that knowingly accepts payments on a note where they know the note holder is dead is setting itself up for the argument that it should not be entitled to payment on the mortgage because it is accepting payments from an individual who 1) was not given proper disclosures under the Truth in Lending Act and 2) may not have passed even the most basic underwriting test.

Existing law is more than sufficient if a spouse who wishes to remain in a house isn’t on a note.  For one thing, spouses, and other relatives for that matter, can assume mortgage payments on existing loans and most credit unions I know are more than willing to accommodate such assumptions.  But whoever takes on the loan has to be able to actually pay it back.  Again, this is not a technicality or an example of servicer indifference but simply a matter of common sense.  There may be a relative handful of institutions that have foreclosed on property for which the spouse was more than able and willing to pay, but the idea that this is a systematic problem is ridiculous.

The real problem, which is outlined in the AARP survey and which the Times acknowledges, is that older Americans are taking on debt, because, like their kids they assumed that the housing values would always rise and wanted to cash in.  Which brings me back to my initial point.  There are plenty of lessons to learn from the financial crisis but if we’re going to make lasting solutions to real problems, we have to first identify what the problems are.

 

 

 

 

 

Entry filed under: Economy, General, Legal Watch. Tags: , , , .

On Foreclosures and Fiscal Cliffs Performance of NY Credit Unions Underscores Need for MBL Reform

1 Comment Add your own

  • 1. Mark Grimm  |  December 3, 2012 at 10:09 am

    Very thoughtful piece. What’s particularly upsetting with the bailout is that people who pay their mortgage (as taxpayers) were forced to bail out the ones that didn’t.

    Reply

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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