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Last week’s ruling by a Suffolk County, New York judge wiping out $525,000 in mortgage debt has sent shudders throughout the lending industry.

Judge Wipes Out Mortgage, Shocks Lending Industry

Last week’s ruling by a Suffolk County, New York judge wiping out $525,000 in mortgage debt owed by an English professor and her husband to OneWest bank has sent shudders throughout the lending industry and given hope to thousands of borrowers seeking relief from crippling monthly payments.

Greg and Diane Horoski bought a $200,000 bungalow in Pachogue, NY in 2004. When house prices soared, they refinanced with a subprime mortgage to start a small business. Interest rates rose, health bills poured in, and then the housing market crashed so that they ended up owing thousands of dollars more than their bungalow was worth.

After they began having trouble making payments in 2005, the Horoskis sought relief. The bank, however, rejected repeated offers to make reduced monthly payments with help from their adult daughter. It flatly turned down an offer by the daughter to buy the house for its current value with money from another lender to pay off the bulk of the mortgage.

Judge Jeffrey Spinner ruled that OneWest’s behavior had been “harsh, repugnant, shocking and repulsive to the extent that it must be appropriately sanctioned so as to deter it from imposing further mortifying abuse”.
Greg Horoski told the New York Post that negotiating with the bank was “like dealing with organized crime”. He said: “I think the judge felt it was almost a personal vendetta. The bank was so intransigent that he decided to punish them.”

OneWest has announced it will appeal. “We respectfully disagree with the lower court’s unprecedented ruling and we expect that it will be overturned on appeal,” said the bank in a statement, claiming it has been “extremely active in working with consumers on home loan modifications through the Obama administration’s Home Affordable Modification Program (HAMP) and other loan modification initiatives.”

Actually, OneWest does not rank at the top of lenders participating in the HAMP program. It was late to the party, signing up for the program August 28, months after banks with many more loans to modify committed to the program. To date it has invited only 27 percent of eligible borrowers to participate in trial modifications and of the total number of loans that are over 60 days in default and eligible for the HAMP program only 13 percent are in trial modification. OneWest ranks 16th out of 26 lenders in the percentage of eligible loans it has taken to the trial modification stage, behind some banks like Bank of America and CitiMortgage that have many more loans to process.

The bank, which received an $814.2 million federal bailout, is owned by a private equity group that purchased the failed IndyMac bank and inherited its portfolio of subprime mortgages, including the Horoski’s. Known as a tough negotiator, OneWest is involved in a case in California similar to the Horoski’s, where it is trying to foreclose on an 89-year-old woman, despite two court orders telling it to stop.
The Horoski appeal will have implications far beyond the fortunes of OneWest. The entire mortgage finance industry will watch the outcome closely, for the case may establish entirely new rules for how lenders deal with defaulting borrowers who are seeking modifications in good faith.

The Horoski ruling gives hope to millions of homeowners that another court will follow suit. The potential is huge. The number of loans 90 days or more past due or in foreclosure today is a little over 4 million. The combined percentage of loans in foreclosure or at least one payment past due in the third quarter was 14.41 percent of all mortgages on a non-seasonally adjusted basis, the highest ever recorded in the Mortgage Bankers Association’s delinquency survey.

Of those four million, the potential number of homeowners in the same boat as the Horoskis-angry over their treatment by their lenders and desperate for relief-could be very large.

A national survey released last month by Move, Inc., operator of Realtor.com, found that the percentage of homeowners with a mortgage who successfully contacted their lenders in the past 12 months to restructure their mortgages to reduce monthly payments is about the same as those who were not successful. Twelve percent of all borrowers said they were successful, 11.3 percent were not successful and 5.7 percent don’t yet know how their modification efforts will turn out.

Blog posts and commentaries, both for and against the decision, have buzzed across the Internet over the Thanksgiving weekend. This one by a real estate professional in the Wall Street Journal sums up one side.

I am so thankful that this is finally happening. I am a Realtor/broker that just went through this with a seller who initially contacted the lender in November of 2007, filled out 3 short-sale packets because they lost them. Had 2 full price cash offers and the home is sitting in foreclosure with an in-ground pool. Lender will lose $100,000 in value because of damage to the in-ground pool and vandalism to the vacant property.

Something has to be done about the vast difference between lender’s policies and practices. Also HELOC’s are no longer “a plenty”.
Not every foreclosure is caused by stupidity. Some are caused by what I would call life. Unemployment, unexpected death, medical expenses, etc. I have sellers right now who have lost their jobs and are now working part-time because they cannot get a full time job. These folks are engineers, IT experts. They continue to seek full-time employment.

That the HAMP program, hailed by supporters when it was launched in March, seems to be stumbling badly limits options for homeowners like the Horiskis. Ironically, the HAMP program was modeled after the successful efforts of the FDIC to modify subprime IndyMac loans like the Horiski’s after the government agency took over IndyMac in 2008. Yet it is talking much longer than anticipated to produce results. Lenders like OneWest have not yet processed a majoirty of their eligible loans. Thousands of loans that have been processed are in six month rather than four month trial period because they lack documentation. In its latest report on the program released earlier this month, Treasury withheld the number of borrowers who have successfully modified their mortgages, raising suspicions the program is having serious problems.

The next few weeks will determine whether the Horiski decision will encourage troubled borrowers turn to the courts for help rather than waiting for their lenders or HAMP to act.

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