New Massachusetts Foreclosure Law Creates More Problems Than it Solves

Judges in the Bay State will soon have the power to determine whether a bank can foreclose on a home or must modify the mortgage.

On November 1, 2012, a little talked-about Massachusetts law will go into effect that gives judges in the Bay State the power to determine whether a bank can foreclose on a home or must modify the mortgage. Signed on August 3 by Gov. Deval Patrick, the “Act Preventing Unlawful and Unnecessary Foreclosures” creates a series of new hoops for banks and other mortgage creditors to jump through in order to foreclose on borrowers who aren’t making their payments.

Under the new law, lenders will have to demonstrate to a Massachusetts court that they made “a good faith effort” to work with delinquent borrowers, and that they took “reasonable steps” to avoid foreclosing. Such “steps” would include considering whether the borrower could make a lower, “affordable monthly payment” relative to their current delinquent loan.

These terms are ridiculously arbitrary: “reasonable steps” and “affordability” will be defined very differently by a bank trying to get its shareholder’s money back, versus a homeowner desperately clinging to a roof over his head. Furthermore, they will be interpreted differently by different judges.

Beyond the risk of arbitrary judicial rulings, the vagueness of the law will likely make financial institutions even more cautious, which will in turn raise mortgage costs and hurt future homeowners. In fact, price data from Zillow.com is already showing a correlated (though not necessarily caused) increase in the cost of a 30-year fixed rate mortgage for Massachusetts borrowers most likely to default (those with a 5 percent or less down payment). The price has jumped from 3.4 percent to 3.8 percent since the law was passed. Who knows how much the price will jump once the law is enacted?

The law also requires lenders to prove that they will reap more revenue from foreclosing on the home and selling it in a distressed sale than from modifying the mortgage. At first glance, this provision seems redundant. Presumably a bank would modify a mortgage if they thought they would take fewer losses relative to a foreclosure, even without the government telling them to do so. But the point of the law isn’t to encourage banks to figure out how to profit the most from delinquent homeowners, it is to empower judges to tell banks that their estimates on value are wrong.

And though judges will soon have that power, they will be far less qualified to determe value than the banks. For instance, implicit in any assessment of whether a foreclosure will be more valuable than a mortgage modification is an estimate of how much selling the home as a bank-owned property would generate. Banks then compare that to the value of a mortgage modification. Not only will a bank and the court likely have different estimations, but from bank to bank there is rarely a concurrence of opinion on housing market futures. This is just the tip of the iceberg in terms of complicating factors for judges and regulators getting into the mortgage value assessment game.

There are still more problematic hoops in the Massachusetts law, such as the requirement that lenders sell homes to special non-profits in short sales, and the extension of the period--from 90 days to 150--that lenders must wait before they can foreclose on a deadbeat borrower.

But the underlying problem with this new law is that it focuses very intensely on the near-term, while willfully ignoring long-term costs.

For instance: If a bank is making erroneous estimates on the value of foreclosures, and taking more losses than it needs to, then judicial intervention will keep a firm in business that should (and prior to this law, would) be allowed to fail. This hurts future businesses that would out-compete the bad banks of today, and means poorer quality service for the local areas those banks serve. (This might seem like a needless focus on unseen costs, but that was the push back on concerns about the build up of the housing bubble during the mid-2000s.)

Foreclosure is a terrible thing for families, and no fun for financial institutions swallowing the loss. However, without foreclosure there would be little lending in the first place. It is an important recourse that keeps the financial system rolling forward. Ultimately, the new Massachusetts law puts too much authority into the hands of the court, does little to help the housing market, and is potentially creating problems down the road.

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  • Whiterun Guard||

    FRIES

  • JW||

    APUUF

  • $park¥||

    Leave it to a dumbass like Patrick to pass a law called APUUF.

  • Bardas Phocas||

    Well that should encourage the home lending industry in Mass.

  • Whiterun Guard||

    Boy those fat cats downtown are really sticking it to those other fat cats downtown.

    So basically the gummint forces the banks to loan money to people, regardless of their worthiness or capability to repay the loan, then makes recouping some of their losses ridiculously difficult.

    This will help the housing market for sure! It's a definite can't miss, like the Yankees in the ALCS.

  • C. S. P. Schofield||

    THIS!!!!

    I have been watching this whole mess unfold, thinking the whole time "Am I the only one who remembers when the idea of loosening the lending standards was one of Jesse Jackson's pipe-dreams? Am I the only one who remembers all kinds of economists writing articles that said, in effect 'we hope you like bailing out lending institutions, because you are going to have to.'"?

  • Night Elf Mohawk||

    Why does the law bother with allowing foreclosure at all? It would be much more straightforward if the law explicitly said the mortgage agreement is null and void with respect to foreclosure and required lenders to ask courts what they'll be allowed to do.

  • sarcasmic||

    Rule of law is boring. Rule of man on the other hand...

  • Whiterun Guard||

    You and your patriarchal fantasies.

  • Restoras||

    I see T o n y has changed his handle to sarcasmic today. Should make the dailyfail links more interesting this morning.

  • sarcasmic||

    Your what hurts?

  • $park¥||

    I'll bet you guys thought it would be impossible to nationalize the housing market.

  • Pro Libertate||

    This sort of thing has been pushed for all along, well before the crash. Make sure people who have trouble repaying loans, regardless of the reason, get relief at the expense of the lender.

    I'm not saying lenders don't do some things they shouldn't in making loans, but the whole mortgage lending industry is threatened when the loans become largely unsecured. Governments are idiotic on this issue and are the principal reason we had a bubble and a crash in the first place. Everyone must own a home! It's evil to set rates based on risk!

  • Restoras||

    I wonder, though, with idiotic laws like this if it might encourage lenders to actually lend to more qualified borrowers, and maybe even demand something more substantial in terms of a downpayment, or collateral?

  • Whiterun Guard||

    They would if most of that wasn't already illegal or regulated so much so as to be unprofitable.

  • Pro Libertate||

    Yeah, but why should they have to? They're lending money secured by real property. Default, then the lender has the option of foreclosing. It's not like they want to foreclose--they've always been pretty willing to negotiate a modification, provided the homeowner is willing to pay.

  • Fatty Bolger||

    Why is foreclosure such a terrible thing? If a renter doesn't pay rent they get kicked out. What makes homeowners so precious that they should be exempt from the same thing?

  • Pro Libertate||

    It's not like people have sunk their life's savings into these houses, either. Houses are typically highly leveraged, even for the wealthy.

  • Pound. Head. On. Desk.||

    People shouldn't be held responsible.
    Especially after a reasonable time has passed.
    This looks like a post-reasonable time.
    Time to stop holding people responsible.

    Pardon me, time to go rinse my mouth out with turpentine.

  • Auric Demonocles||

    Well, except for people who already have money saved up. Like people who lend other people money. They should be held responsible.

  • Rasilio||

    Realistically this.

    I mean if you're a dumb ass who hides his head in the sand till the sherrifs show up and throw your stuff out on the street it is pretty terrible, but reasonably if you can't pay and you know you can't pay you work out a move out date with the bank after getting to live in the property for 6 - 12 or more months rent free and get a cheaper apartment or rental property. Then you move on with rebuilding your life.

    It's not like they are going to throw you in debtors prison.

  • Pound. Head. On. Desk.||

    Sounds to me like they are trying to solve the wrong problem. A friend got into financial straits, and as part of getting things back on track he handed his home back over to the bank. And here it is, (4? 5?) years later, and they still will not legally take it.

  • Whiterun Guard||

    Does he still live in it?

  • ||

    Did he try to do a deed-in-lieu of foreclosure? If a person goes that route but doesn't know how to negotiate it, the bank can take the home but still come after the person for the deficiency (difference between the market value of the home upon receipt and the balance of the loan). We come across a lot of people who try to do that and make sure we can negotiate away the entire deficiency or at least reduce it to a couple thousand on a promissory note.

  • Rasilio||

    Yeah I'm dealing with this now.

    Got laid off and saw no reasonable possibility of replacing enough of my income to be able to pay the mortgage in the local market so I stopped paying it and moved to another state where I could earn a living. I contacted a couple of realtors about the possibility of selling the house and they basically said in order to sell it quickly I'd either have to drop the price to below 3/4ths of what I owed on the mortgage or put $20k into repairs to make it look pretty and then still list it for less than what I owed.

    I called the bank the day I made that decision a full month before I had even missed a payment and told them what was going on. That was over 18 months ago and they finally got around to sending someone out to secure the property 3 weeks ago.

    In the meantime since the electricity was off and the sump pump was not running there is apparently 4 feet of standing water in the basement meaning the entire HVAC system is gonna have to be replaced and if they don't do something about that when the winter comes and that water freezes it'll crack the foundation.

  • Fatty Bolger||

    Why turn off electric? Was the minimum bill that high?

  • Rasilio||

    Because honestly it never occurred to me that it would take them more than a year to take possession of the property.

    I figured 3 - 4 months at tops

    And yes money was a driving factor, remember I had lost a job and was relocating over 1000 miles a way on my own dime. Cash has been extremely tight and I would not have been able to make even minimal electric payments anyway

  • Pro Libertate||

    If the government hadn't intervened after the crash so heavily, the lenders would've taken their losses and moved through the foreclosable inventory. Instead, we have weird, nonmarket-like behavior.

  • Invisible Finger||

    I'm not so sure about that. Some of the lenders would have gone bankrupt.

    Now, if the government had done ITS job instead of trying to avoid doing it, the bankrupt lenders would have been FORCED to foreclose and then liquidate the property. But government can't have property values going down.

  • Pro Libertate||

    Absolutely some of the lenders would've gone bankrupt. And, quite likely, a lot of assets would've moved on to more solvent banks' balance sheets, who would've moved quickly to clean everything up.

    You're right, too, in noting that the bankruptcy courts likely would've forced actions on foreclosures for the lenders reorganizing rather than liquidating.

    Interestingly, the one bank that did "go bankrupt"--Washington Mutual--still has a suit going on challenging the handing over of their assets to Chase. I seem to recall that there was some real question about whether WaMu actually didn't have enough assets on the books to survive the crash. But the FDIC forced their hand.

  • GroundTruth||

    "If a renter doesn't pay rent they get kicked out."

    Not in Massachusetts. Just ask any landlord what is involved in evicting a tenant for non-payment of rent in this state. The tenant has all the rights, and the landlord all the responsibility.

  • Pound. Head. On. Desk.||

    Virginia, while not as bad as many states, is much the same way.

  • Whiterun Guard||

    In California, all homes will wind up being owned by Michael Keaton.

  • $park¥||

    Well, all those clones need to live somewhere don't they?

  • Whiterun Guard||

    Well I figured most would either be on hockey teams or dead from cancer after making home movies.

  • ||

    This is why I always demur when friends ask me why I don't just rent my place instead of trying to sell it. No fucking way I want to be a landlord in VA.

  • C. S. P. Schofield||

    And then people wonder, loudly, why all the landlords who are left in the business are swine.

    And they look so shocked when I tell them "Because you, with your 'good intentions' created conditions calculated to drive anybody with even rudimentary ethics out of the business".

  • Auric Demonocles||

    My cousin, in VT, had some relatives of his wife manage to stay in the room above his garage for 10 months before being evicted, after paying $200 to stay there for 2 weeks. This included heating the place with electric space heaters all winter, which my cousin had to pay for since he wasn't allowed to shut off the electricity. Apparently once they were finally kicked out, they went to a hotel to try to do the same thing.

  • ||

    Same in Quebec. My parents own properties. It's hell to get rid of deliquent jerk offs who know how to game the system.

    Shhh. Don't tell Tony and Obama a lot of losers do exist.

  • Loki||

    You know, I'm beginning to think that trying to be a good, honest, responsible person who plays by the rules is being a chump. The deck is stacked completely in favor of being an irresponsible jerk off. There's really no point in trying to be a good person anymore. God dammit I hate people.

  • Auric Demonocles||

    I keep feeling this way on the drive in. Nothing happens to the people screwing traffic over (even the people getting screwed are stupid enough to let the person merge back in from a "left turn only" lane), but by obeying the rules I have to wait an extra 4-5 minutes.

  • Rasilio||

    Yes there is.

    You can look at yourself in the mirror every day and not throw up.

    That is reason enough for me.

    That said I agree and it is occasionally REALLY tempting to just say fuck it and get diagnosed with a disability.

  • Pro Libertate||

    That's why we're in a decline, in part. We reward failure, fraud, and dishonesty by governmentalizing everything. It's inherent.

  • ||

    Loki, I hear you. Same here. I work in a heavily regulated industry and when the pinheads from the bureaucracy show up, my sister takes over or else we'll lose our permit with me around. They HATE to be questioned. HATE IT. After all they know what's best for me.

    We can just but nod our heads. What can you do? If you throw the bums out yourself, the media will be there to depict you as a slum lord and the cops will be hauling YOU in.

    We're about as honest as one can be. We follow all the proper channels. Pay outrageous taxes. Obey the cops. And for what? To watch the losers have all the power. To watch politicians engage in obscene corruption as they do here in Montreal.

    You do want to go up to them and simply say: Fuck. You.

    Alas, that wouldn't be polite.

    Guys like Duval in Mass. are happy to group the "weak" and the "stupid" into one welfare mess.

  • ||

    The worst thing about this law is that it shits on contract law. Working in a foreclosure defense law firm, I come across dozens of clients each day who complain that the bank is being unreasonable. Meanwhile, they are the ones who signed a piece of paper saying that they are responsible fore repayment of the loan.

    Yes, if you are having difficulty paying, the banks could work with you. But they don't have to, and the people who get belligerent because of that are the ones that really grind my gears.

  • Auric Demonocles||

    Yeah, when I read this:

    Under the new law, lenders will have to demonstrate to a Massachusetts court that they made “a good faith effort” to work with delinquent borrowers, and that they took “reasonable steps” to avoid foreclosing.

    my first thought was "Why should they have to? The lender and the borrowers already agreed on what it would take to foreclose."

  • C. S. P. Schofield||

    I sympathize with the feeling, but it isn't as simple as all that; people were told BY THE FOLKS LENDING THEM THE MONEY that they should be able to support such-and-such a loan. Now, they were told that because the pinhead politicians had told the lenders that they had to lower the standards, and hinting people away from loans that fit the new standards would have gotten the lenders in BIG TROUBLE. But lots of people assumed that the banks wouldn't make a loan they they had no realistic hope of getting back.

    I know this, because My Lady and I bought several houses during the bubble, and she was a mathematician her Father was (then) a consulting actuary. When we were told numbers that made her suspicious, we took them to her father and he was able to show us how the assumptions had changed and what that really meant.

    Most people didn't have my Lady's node for math, or someone in the family who could do the checking. So they trusted a system that the politicians had altered to be a trap, and got trapped.

    We ought to garnish the retirement accounts of every single political pinhead who voted for the bills that made the mess in the first place. Not to mention boiling the entire staff of Fannie-mae and Freddie-mac in boiling oil and tarring and feathering Jesse Jackson.

  • ||

    GB,

    I was a stock broker 1999-2005, and it was a similar situation. Back then, the market was going nothing but up and so people thinking they were geniuses back to borrow on margin to invest.

    My partner and I made damn sure - along with compliance of the bank - people UNDERSTOOD the risk of using margin.

    "Yeah, yeah, yeah, where do I sign?" was the general response.

    Fine. At some point the investor (ie HUMAN BEING) has the final say and is assumed to accept responsibility of their actions.

    Right.

    Once the margin call came, we were suddenly the "thieves."

    It's like dealing with greedy little children.

    Naturally, the government sides with the idiots.

  • ||

    "began to borrow."

  • Auric Demonocles||

    Once the margin call came, we were suddenly the "thieves."

    The "greedily gave mortgages to people who couldn't afford them" meme pisses me off. Are these people so stupid that they're not responsible for asking for and accepting the mortgage?

  • ||

    The concept of the mortgage is perhaps one of the most basic of all financial options in terms of familiarity with the public.

    When you grow up, everyone heard of it and have a general idea of how it works.

    One of the driving, fundamental principles of it was to pay down what you borrowed. You took a mortgage you could afford. It wasn't genius stuff and if you were lucky enough to be raised in a family of responsible adults, you were aware of the process and seriousness of carrying mortgage debt.

    I don't know what the fuck happened in the States for people to have lost sight of the most elementary of investment philosophy.

    The government are making it worse by enabling all this ignorance.

  • Invisible Finger||

    Threadwinner.

  • LTC(ret) John||

    Good thing MA lenders will be able to go to the US SCT and get relief...oh, wait.

  • Auric Demonocles||

    As a mid-twenties MA resident who might get a house in the next 5-10 years, let me just thank the Governor for making it harder for me to do so, both because banks will be less eager to lend, and because there will be less houses on the market.

  • ||

    Don't forget that the prices will be artificially inflated, too!

  • Auric Demonocles||

    I thought I had that implicitly covered between mentioning more expensive credit and a smaller supply...

  • Drake||

    Yep - risk has a price.

  • Alice Bowie||

    I hope more states pass this law. No need for federal intervention. Let the States decide.

    This law doesn't go FAR ENOUGH. It should MAKE THE Servicing BANK responsible for dragging it's ass and the holding bank responsible for not making a deal.

    I think this will encourage banks to work with people. This will be good for BOTH the investor and the dweller. Most of which would be ok with a 30/yr P/I at the prevailing rating.

    - The homeowner is BEGGING for a Break and willing to pay $.75 on the dollar.
    - The Investor is BEGGING for his money back (even .50 on the dollar)
    - The Servicing bank does NOTHING... Sits around for YEARS before seizing the house. The investor gets (at best) $.25 on the dollary

    What...that the banks have to jump through more loop-holes?

    Truth is, banks could have made a deal, decided not to, and the government stepped in.

    Free market requires FAITH. That is, business will behave. If you don't want the government stepping in, BEHAVE. There would be no Romney-Care or Obama-Care (whatever u want to call it) if insurance companies didn't weasel out of claims.

  • DanD||

    Protip: capitalizing random words does not make your argument more cogent or persuasive.

    People taking out a mortgage sign a contract stating that they will pay x amount per month. Period. If they're in a situation where they couldn't make payments if their income stopped or lessened for a few months, they made a bad decision, and so did the bank.

    But the system has been perverted by government. Do you not understand the consequences of the "fair lending laws" which forced banks to lend to people who weren't credit-worthy? Compound that with Fannie and Freddie and there's every incentive for a bank to be irresponsible.

    Your view of this is way too simplified. It's not just the bank and the borrower. There are many other variables in the equation, and that's what leads to what you so simplistically perceive as "bad behavior." In the absence of these perverting factors, banks have every reason to perform due diligence to cover their asses against catastrophic losses, and the ones that survive more than a few years would have done so.

  • Alice Bowie||

    And the investor loses more and more.

    A Dweller (i don't even want to call them homeowners as the bank really owns the home) is complying by the contract when they stop paying. The contract states that the bank can come and take the home. There's nothing imoral, illegal, unethical, or un-american, or anti-capitalism by the dweller reaching out to the administrator and asking for a $.75 on the dollar deal.

    And, when the bank does nothing, well fine, the dweller (and I now 100s of people in this situation) stops paying, recovers the dweller's loss in the 3/4 years it takes a bank to forecolose, and the biggest loser is the investor.

    I know libertarins generally side on the big-money-guy side and to hell with the little guy. It this case, the little guy is in position to win.

  • Calidissident||

    Do you not realize the incentives your system puts in place for borrowers to abuse?

  • Alice Bowie||

    In Libertarian-style capitalism with (little to no regulations), there appears to be no concerns with the incentives put in place for sellers to abuse...right?

    once the Gob-ment makes regulations to curb seller abuse...it's too much government intervention. The gob-ment kicking a family out of their house so that it can be vacant so that the investor can enjoy $.20 on the dollar...is good business practice.

  • ||

    You don't 'invest' in a mortgage. You "borrow" a mortgage with hopes of owning a home while building equity.

    You shouldn't buy a house as an investor or for an investment I believe.

  • Rasilio||

    " they made a bad decision, and so did the bank.

    "

    Here is te one place I take issue with this whole thing.

    You cannot call this a bad decision because it didn't work out in the end.

    Profit and loss require risk. Hell that is one of the components that goes into determining the interest rate, the risk of default. The fact that a default has occurred does not make it a bad decision to have made the loan in the first place,and the fact that the buyer for whatever reason got into a situation where he could not fulfill the terms of the mortgage does not mean taking out the loan was a bad choice.

    Profit requires risk, risk requires the possibility of loss and taking a loss only makes it a bad decision if you incorrectly calculated the risk of loss/likelyhood of profit incorrectly.

  • Alice Bowie||

    I agree.

    However, those 'floosy' loans that they gave out was really really really bad for the investor. I'm not even sure that the invester was aware of the crappy lending standards and the corrupt cretit ratings.

    You would go to to a regular Joe that is not qualified to pay, offer him the house based on a one year teaser rate, and SUPRISE.

    Yea, Joe was represented by attorney, and should have read the document. However, the banks knew better and were reckless with the investor/depositer money.

  • Alice Bowie||

    The system will always be perverted by government when either the buyer or the seller doesn't behave.

    The fair-lending laws were brought in due to people mis-behaving.

  • Alice Bowie||

    Btw everybody. Here's a video showing that liberal democrat pinco communist that was pushing for "EVERYONE SHOULD HAVE A HOME" bit.

    http://www.youtube.com/watch?v=kNqQx7sjoS8

  • DanD||

    I think it's been stated here many a time that there's very little difference between the two major political parties. Think hard about it why we say "team red" and "team blue."

  • Alice Bowie||

    I only hear that when its convenient.

    WHat i hear from most conservatives is that Obama caused the credit crisis by making loans to poor people after he arrived from Kenya and before he prayed to the muslims.

  • Rasilio||

    That's because most conservatives are firmly in the team red camp.

    round these parts however, a couple of notable exceptions aside we hold both teams in pretty much equal levels of contempt and the general story you'll get is that the crash back in 08 was an inevitable result of loose monetary policy from the Fed going all the way back to at least 1990, things like Freddie, Fannie, and the CRA just helped choose which sector of the economy the inflationary money be directed to and therefore where the crash would occur.

    You will also note that nearly all of our preferred course of action would have punished banks making bad loans plenty, by letting them go out of business, not bailing them out.

  • kwais||

    I for one, have a home, and a mortgage.
    More often than not, I want to burn the house down and let the bank have what is left.
    Or really, I could just say "here have your house back, I don't want it"
    Because value wise, it is already burnt down.

    I make my payments on time. I want to keep it, even though it is worth half of what I am paying for it.
    And still I am constantly hassled by the bank. I get foreclosure notices posted on my door.
    I get my checks returned for no fucking reason.
    I get them denying that they received documents that they signed for.

    Calling them and getting ahold of someone is a full time job.
    My bank deserves to go under.
    The bailout stopped the market from doing what needed to be done.

    If I do default on my loan, they get from the taxpayer more than I ever owed on the house.

  • Alice Bowie||

    Best to just stop making the payments...save the money...and wait about 2-3 or even 4 years until the bank wakes up from the coma and comes to take the house.

    By then, you would have recovered all of your loss, the creditor would get $.25 on the dollar, and your credit would be shot.

    So your credit is shot...BIG DEAL, if u save up the payments, who needs credit. You can go to a landlord and give him the year's RENT in one lump sum if they don't trust your credit report. THIS IS WHY YOU NEED TO STOP PAYING and SAVE the MONEY. So you can buy a car, rent a place, etc.

    Please, being denied credit is a good thing. Those who are debt free...are truly free.

  • thesafesurfer||

    So banks won't write new loans in Massachusetts to anyone who doesn't put 20% down, had the same job for five years, and an 800 credit score. So the pool of buyers relative to the houses for sell in Massachusetts. and prices of homes will decrease and so will property taxes.

    Stupid, stupid, stupid.

    Mortgage funding will flow along the path of least resistance and that sure won't be in Massachusetts.

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