Why You Should Not Expect Your Bank to Voluntarily Rewrite Your Loan

Economists of every political stripe agree that our recent recession and lackluster recovery arose from a collapse of real estate markets in cities all over the country.  Homeowners are either stuck in properties worth less than what is owed on them, while other homeowners have just walked away.  The result is a landscape where real estate has lost its liquidity and banks are afraid to rely on real estate to extend needed loans, thereby freeing up the capital markets.

A few years ago, a several members of Congress floated the idea of empowering bankruptcy judges to “cram down” mortgages to equal the fair market value of the underlying real estate.  Currently bankruptcy judges can, with some restrictions, cram down auto loans and other secured debt to fair market value in Chapter 13.  From my perspective as a bankruptcy lawyer, this cram down power does a lot of good.  Debtors can now afford to keep their vehicles, and thus their means to and from work.  The used vehicle and used furniture market is not depressed with excessive inventory of returned property and more people are able to reorganize rather than liquidate.

The mortgage industry, however, has fought any effort to authorize a disinterested third party like a bankruptcy judge to help solve the nation’s credit problems.  Lobbyists descended upon politicians of both parties to fight the proposed mortgage cramdown powers and somber executives from large mortgage companies testified before Congress that they would voluntarily work with property owners to modify mortgages.

As my BLN colleagues have explained in detail both government and private efforts to modify mortgage loans has been an abject failure.  In my Atlanta area bankruptcy practice I regularly speak to homeowners who fall behind a month or two, apply for a modification program, are strung along for months only to learn days before a scheduled foreclosure that their application for modification was denied.

Banks are not cooperating with small businesses either.  Recently, I noted the following Facebook post from my favorite pizza restaurant who suddenly announced that was closing one of its three locations:

As of January 1st, we regret to inform you that we will be closing our Duluth Hwy. location (ONLY). We have finished our 5-year lease at that location, and we simply cannot afford to renew for an additional 5 years with the new lease terms quoted by the property owner. Currently, the shopping center is in foreclosure and is bank-owned; because of that, there is almost no room for negotiations between the landlords and the tenants.
Believe me when I say that we do not want to leave. Besides the hassle of moving equipment and furnishings, we also hesitate to go because we know we have a large and loyal group of customers who will be missed dearly….Thank you so much for understanding, and please help us spread the word (as we are not allowed to put a sign on the door at the Duluth Hwy. location).

I can tell you from first hand experience that this pizza restaurant is not a struggling business and no one benefits by the bank’s action.  Employees will lose their jobs, the shopping center will lose a viable tenant that no doubt brings other traffic to the neighboring stores and customers like me will have to drive further for our meals.

Here we have a bank that simply will not negotiate, and appears to be going out of its way (by refusing to allow a sign on the door) to harm a former tenant.

If you ever had any illusions that your bank will voluntarily help you in a moment of crisis, let that illusion disappear.

What does this reality mean to you and how should it affect your future financial dealings?  I’ll offer my opinion in a future post.