A duty to modify a home loan?!

Some mornings, I will listen to NPR to catch the news.  I caught the tail end of a piece on mortgages and foreclosures.  They had a plaintiff’s lawyer talking about how bad banks are and the announcer made a comment to the effect about people being forced out of their houses because banks wrongfully failed to modify their home loans.  “What?”  I thought.  “Did I hear that correctly?”  Since homes have generally declined in value and since unemployment is high, I suppose it is easy to get to a point where people believe that banks and credit unions not only should work with their borrowers but that they have a legal obligation to do so.

Generally speaking, they don’t.  Sure there are special plans under HAMP and there may be local work out requirements before a foreclosure goes forward, but the decision as to whether to grant a borrower a loan modification still rests with the lender.  And you know what?  It should.  It is easy to look at one side of this story, but we do so at our peril.  All of our credit union readers understand the concept of Asset Liability Management.  Credit unions must balance their assets with their obligations over time.  Things must match up, more or less, or catastrophically bad things will happen.  For example, if a credit union has a very large portfolio of real estate loans at 4% with an average length of 10 years, it must correspondingly make sure that its assets, expenses and dividends don’t exceed the performance of these loans.  There is more to it than that, but essentially, it is simply planning so that you don’t make commitments that exceed your income.

The U.S. Government (which is known to have a problem understanding that concept) mandates strict rules on ALM for credit unions via the NCUA.  In fact, up until a few years ago, a credit union would have been in trouble if it did too many loan modification agreements!  The NCUA would have suspected that the credit union was trying to hide delinquency in the form of loan mods.  It’s an old trick.  Today, of course, it often makes sense to do loan modification agreements and they are encouraged.  But the idea that loan modification agreements are obligatory and that financial institutions must adjust interest rates on fixed rate mortgages to meet the needs of the borrower remains a pipe dream in the minds of class action lawyers.

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