Foreclosure Stories: Is FHA no better than Fannie and Freddie?

May 17, 2012


This is a weekly column by Sandusky attorney Dan McGookey, devoted to telling true stories of homeowners who have been victimized by a lending system which makes it profitable to foreclose. The names used have been changed for privacy purposes. This is Karen's Tale.

Karen came into our offices recently with a story which is yet another sad reminder of how the government entities meant to encourage and protect home ownership in America are either looking the other way when it comes to enforcing the rules prohibiting the banks’ bad behavior or have simply just thrown in with the banks altogether. This time, it’s the Federal Housing Administration (FHA) which is the culprit.

One need only compare the conduct of the bank in this case, JD Morton Cheat Bank towards Karen, with the overall spirit and intent of the FHA’s rules to see how corrupt our banking system has become. Karen signed her $64,000 home loan in May, 2006 in favor of U.S. Mortgage Corp. The loan was insured by the FHA. Even though she had a high interest rate of 7%, resulting in high payments for the amount she borrowed, Karen was able to keep up with her payments until the end of 2010. At that time, Cheat declared that Karen was behind in her payments.

Over the course of the next few months, Karen tried her best to make amends with the bank. She drove to the nearest Cheat bank one county away to make a payment in person, only to have the bank turn her away by refusing to accept the payment. When she offered to pay the entire sum the bank claimed was past due, $3,000, (an amount she disputed), even then she met with rejection.

Karen was never offered a HAMP modification, a face-to-face meeting at which a resolution could have been discussed, or an opportunity to reinstate the loan, all specific requirements under the FHA rules. Because of these clear-cut violations, we are extremely confident that we will meet with success not only in keeping Karen in her home but also under a loan with much more favorable terms than she had before. And the icing on the cake? We are even going to seek reinstatement funds for Karen from Hardest Hit, a program administered by the Ohio Housing Finance Agency.

Ironically, when all is said and done, Karen will greatly benefit from Cheat’s misconduct, and Cheat itself, and the owner of Karen’s loan will suffer. Even more ironic is that fact that the FHA, which would have had to pay Cheat the difference between the amount claimed to be owed on the loan (most oftentimes an inflated balance), and the amount Karen’s home would have sold had foreclosure occurred, benefits as well, being spared that loss. So the end result is that the government benefits from the enforcement of its rules; rules enforced by the homeowner, not by the government.

The lesson in Karen’s story is one I have preached many times before in this column. In the day and age of loan securitization, it is profitable for the banks in charge of your loan to foreclose. Compounding the problem is that the government, whether because of misfeasance or malfeasance, is never there to rein the banks in. That leaves it up to the homeowner to protect him- or herself. The good news is that there are many effective weapons at the homeowner’s disposal, such as FHA rules, allowing him or her to do so.

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Next week: The story of Elliott, who gets sued for foreclosure based on documents which are clearly fraudulent on their face.

Copyright 2012 Daniel L. McGookey