Does It Help To Put Faces With Foreclosures?

Many troubled homeowners have complained about banks treating them like a number instead of a person. Some blame the impersonal nature of the mortgage industry on securitization, which put the onus on overworked servicers to deal with homeowners, instead of their local mortgage bankers. The front page of the New York Times today contained a story about an attempt to change all that. In Philadelphia, a new law requires that the homeowner and lender meet in person to discuss the situation before eviction can take place. While a quaint idea, I just don't see the point.

Here are some details from the Times:

Under the rules adopted by Philadelphia's primary civil court, no owner-occupied house may be foreclosed on and sold by the sheriff's office before a "conciliation conference," a face-to-face meeting between the homeowner and the lender aimed at striking a workable compromise. Every homeowner facing a default filing is furnished with counseling, and sometimes legal representation.

There are a couple things to remember here. The bank is, ultimately, going to want to do whatever is in its best interest. In some cases that means modifying the loan. For example, let's say $150,000 is owed on an underwater mortgage. Maybe the borrower could afford to pay if it's written down to $125,000. But if foreclosed, maybe auction would only get the bank $100,000. Clearly, modification is best for the bank.

But a face-to-face meeting won't change that fact. And if foreclosure is a better alternative for the bank, then meeting in person won't change that either. It's a waste of time.

What I suspect is going on here is that Philadelphia's primary civil court is attempting to appeal to bank representatives' sense of humanity. When sitting across the table from the actual homeowner whose life foreclosure may turn upside down, it might be harder to say, "No."

Maybe, but again, I doubt it. Most banks are still gaining their footing in this market, so numbers do matter. They're hurting too. And these loan officers likely have to answer to a higher level person who won't be happy if they start giving troubled homeowners sweet modification deals because the homeowners looked so sad.

The problem is that face-to-face meetings don't change the reality of the situation for these homeowners. For example, let's look at the individual that the Times focuses on in its story:

A union roofer, Mr. Hall, 42, had not worked since August 2008, when the contractor that employed him as a foreman went broke and laid off more than 40 people. He had not made a mortgage payment in more than a year, and his lender, Bank of America, was threatening to auction off his house through the sheriff's office.

His story is a tragic one, no doubt. I feel genuinely bad for the guy. The Times portrays him as pretty responsible but someone who has fallen on hard times. Yet, he hasn't paid his mortgage in a year, or been employed for longer than that. So let's say the bank had been forced to hold a face-to-face meeting six months ago when he first defaulted. We know he still wouldn't be able to pay for the six months that followed, as he remained unemployed. If the bank had drawn up a modification at that time, he would simply have defaulted again. Or maybe it could have deferred his payment, but how long should it be expected to wait for him to get a new job?

By forcing these meetings, all you're doing is prolonging foreclosure. If these individuals would have qualified for a modification, then that won't change. Instead, banks won't be able to foreclose until they've worked their way through a growing queue of others who have to be met with. Meanwhile, if lenders do decide to appeal to their "human" sides, this will likely result in more re-defaults, because the decision would be based on emotion instead of legitimate underwriting standards.