Law v. Common Sense. A view from the trenches.

Law v. Common Sense.

A view from the trenches.

By Mark A. Winsor

The “win-win” philosophy is widely acclaimed in business, sales and psychology. It is also a popular negotiation philosophy. Of course, it doesn’t seem to work well in sports. I am reminded of a t-shirt I saw at a track meet that advertised: “Second Place is the First Loser.” I am sure many of you would agree that many times in litigation, first place is in reality the first loser. As the parties battle for legal victories, common sense is often abandoned resulting in financial, emotional and spiritual loss on both sides. That is assuming, of course, that there was any spirituality to begin with.

I find this “lose-lose” mentality is one of the causes of our housing crisis. I am astounded at the misguided attitude of many lenders. Like a reckless child they stubbornly pursue positions to their own detriment while leaving a trail of devastation to our neighborhoods and the lives of many good people. Quite frankly, I just don’t get it.

For example, a couple of years ago a slick-talking loan agent sold a negative amortization loan to Julie (name changed), a single woman with three foster children. The payment was very affordable… at the time. Through the stacks of paperwork, Julie didn’t understand the payment was only temporarily affordable. She also didn’t realize the loan was growing as a result of the unpaid interest. Then, as the affordable loan transforms into a hungry beast devouring her income she hires an attorney and discovers RESPA and TILA violations. Meanwhile, the housing market falls into a dangerous freefall, arguable caused in part by numerous loans of the very type peddled to Julie. The lender geared up for legal battle and settlement discussions ensued. But rather than using common sense, the lender entrenched itself in legal foxholes and began preparing its artillery. This, of course, takes time. The housing market continued to tumble and Julie woke up one morning to discover houses in her neighborhood selling in foreclosure for half of the amount of the loan offered by the lender in settlement. So, Julie uses her common sense and retreats by surrendering to the lender yet another house to sit vacant in its already over-loaded stockpile.

Another example. Lane and Dorothy (again, names changed) have an adjustable rate mortgage with a payment that is now too large to handle. The lender informs them that in order to consider a loan modification they must be behind in their payments. That is an easy request to accommodate since Lane has also had his income slashed by 25% by a struggling employer. A representative in the Lender’s loss mitigation department picks up the case and works on a loan modification. This, of course, takes time. A lot of time. Enough time that the lender sends out a Notice of Trustee’s Sale to protect itself. As the date of the sale approaches the Lender’s representative assures Lane that the trustee’s sale date will be postponed. However, the bureaucratic right hand has no idea what the left hand is doing and the house is taken by the lender at the trustee’s sale. One would think that common sense would dictate some kind of simple fix since the lender’s representative in the loss mitigation department intended to keep Lane and Dorothy in their home with a loan modification. No way. You see, the matter had now switched departments.

In a further common sense approach to save his house, Lane gets an investor willing to buy the house from the lender a little below current market value. The investor is interested because he has a good tenant willing to buy the house from him later at a higher price. But the lender, with obvious disregard of common sense, clutches to a sales price the investor is unwilling to pay. The investor pulls out, Lane and Dorothy lose their home, and the lender gets a property back that likely sat vacant in a declining market. But the law was on their side.

Almost every day I see examples of lenders abandoning common sense because of their legal rights. Short-sales fall through because lenders unreasonably stand on their right to pursue the deficiency only to push the debtor into bankruptcy. Or worse yet, lenders foolishly demand that the seller agree to be responsible for some or all of the deficiency in order for the short-sale to close despite the seller’s protection by our Anti-Deficiency Statutes. The lender turns it back on recovering some of its money in a short-sale and exercises its right to foreclose, thereby incurring more expense, recovering none of the deficiency and adding one more house to sit unproductive in the foreclosure portfolio.

I see the advertisements from lenders and hear their executives talk about what they are doing to help our failing economy and housing market. Maybe if they would stop for a moment and use some common sense … just maybe.