Mortgage crisis will worsen if lenders don’t bend

It's funny how the tone of America's mortgage crisis has changed in recent months.

Last year, we heard the nation's mortgage trouble was really a morality tale about irresponsible home buyers, lowly wage-earners who had no business taking out loans. Those homeowners were scolded as unsophisticated dreamers -- some with fraudulent applications -- who reached too far and paid the price. It was a cynical deception promoted in part by those who saw the ship sinking but assumed they'd never get their feet wet.

You don't hear that old canard much anymore now that many thousands of white collars have joined the working class in the foreclosure line. Americans of every social station are locked in an increasingly desperate struggle to compel some of America's largest banks into renegotiating their home loans in compliance with the Making Home Affordable guidelines and the federal Home Affordable Modification Program. Nevadans have been hit hardest of all by the mortgage crisis and plummeting real estate market.

HAMP provides no easy solution. Those fortunate enough to get more than a 90-day trial modification may see their mortgages reduced to a third of monthly income. But as The New York Times reported in January, of the 759,000 who received temporary adjustments only 31,000 saw their modifications become permanent. Corporate behemoth Bank of America owns hundreds of thousands of loans that qualify for modification, but as of late last year its officials admitted they had issued only 90 permanent modifications.

Americans lost 1.7 million homes in 2008, more than 2.2 million in 2009.

In Nevada, with the nation's highest foreclosure rate, attorneys Matthew Callister and Brooke Bohlke continue to go up against corporate banking giants in an effort to freeze the foreclosure process for hundreds of homeowners. They recently added class action litigation against Wells Fargo and JP Morgan Chase to their ongoing suits against Indymac Mortgage (now called OneWest) and Bank of America.

Their plan is simple: Freeze the foreclosure process long enough to drag the banks into court and compel them to follow the law and make a good-faith effort at mortgage renegotiation.

Callister says, "No individual could afford to sue the bank. You shouldn't have to sue. It's already the law of the land."

For those who qualify, the results are heartening: a new loan at preferable interest, based on fair market value with a monthly payment based on 31 percent of the homeowner's monthly gross income.

The possibility of a balloon payment at the end of a 30-year mortgage frightens away some homeowners, who increasingly are walking away from the program and the hassle.

Here's one possible remedy, put forward by economics professor Eric A. Posner in the American Law and Economics Review: Allow homeowners to reduce the principal they owe in exchange for giving mortgage holders an equity interest in the property.

That gives homeowners incentive to stay the course in miserable economic times; it also gives the lending institution incentive to work with the homeowner. When the home sells, the homeowner and the bank split the profit.

Posner's proposal could help prevent neighborhoods from turning into ghost towns.

"This is the obvious remedy," Callister says. "And this is a must for Nevada."

What if such a fair-minded proposal doesn't become law?

Well, 85 percent of Nevada homeowners are upside down in their mortgages. Many will seek renegotiation from game-playing banks, but others will fail to see the sense in hanging onto a home that will never regain its original value.

Then they'll look at the headlines, see stories about corporate bank executives receiving millions in bonuses, and they'll walk away from their homes.

And the American mortgage crisis will worsen as it spreads from distant neighborhoods to one that looks very much like your own.

John L. Smith's column appears Sunday, Tuesday, Wednesday and Friday. E-mail him at Smith@reviewjournal.com or call 702-383-0295. He also blogs at lvrj.com/blogs/smith.