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Saturday, October 9, 2010

Foreclosure Freeze, But Still Not Paying

The essence of the problem with the growing foreclosure moratorium is captured by a one-line quote from a foreclosure auction referee, Jerome Patterson, in New York State Supreme Court, Queens County:

"You can say the documents aren't properly notarized but these people still aren't paying their mortgages."

This indicates the problem with all of these mortgage modification government initiatives that are premised on being adjusted for a borrower's reduced ability to pay.  A modification means the bank holding and servicing the mortgage agrees to take a lesser payment, to reduce its own income and perhaps even to take a loss (factoring in the anticipated lifetime of payments on the loan, if paid), while still retaining all of the risk on the loan if the borrower defaults again.  This explains why the banks have been dragging their feet on modifications.  Absent what is a worse idea -- a government subsidizing modifications by means of a one-time "loss protection" payment to the banks to offset a principal reduction, which would then allow for a reduction in monthly payments, the modification makes no sense to the banks.  Even with a principal reduction subsidized in such a manner, we have, at best, a relatively small benefit (with a reduced monthly payment) to a homeowner whose future ability (or willingness) to make the smaller payments is still in doubt, while the government -- that means the taxpayer, you and I -- makes a large payment to offset the principal reduction.  The upfront cost being substantial, one fails to see the corresponding benefit, and sees only the illusion, the hope, of a long-term benefit.

Whether it is the government, or the judicial system, allowing or encouraging defaulting, nonpaying borrowers to remain in their homes for free, such a system will only transfer the losses.  First, banks will get -- and have been, you can be sure -- hammered on lost mortgage servicing income (monthly payments).  Then, the banks will seek to recoup those losses, either through government subsidies, generating income from other sources or reducing their loss exposure elsewhere. 

If you follow this logic, can you see how anything that stalls a meaningful housing recovery will hold up any meaningful economic recovery?

Eric Dixon is the president of Eric Dixon LLC, headquartered in New York City.  Mr. Dixon has been a New York lawyer since graduating in 1994 from Yale Law School.  Mr. Dixon handles litigation counseling and litigation stress management for those who are the subject of lawsuits, have been threatened or expect to be sued or investigated.  Mr. Dixon has extensive knowledge of corporate governance, the federal securities laws (including the many anti-fraud provisions and related issues) and election law, and significant experience in representing businesses and their owners and managers in litigation, government investigations, settlement negotiations, complex due diligence investigations and business formations.  Mr. Dixon has also represented over two dozen political campaign committees and candidates for public office, including presidential and gubernatorial campaigns, on ballot access issues.  Mr. Dixon may be reached for a confidential consultation and case assessment at 917-696-2442 or via e-mail at

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