Most in foreclosure weren’t paying

The state's foreclosure mediation program, largely ineffective and tied up in legal limbo since it was launched a couple of years ago, suddenly has the teeth to take a bite out of lenders.

And that's not necessarily good news. The public may want to see banks pay a few pounds of flesh for their role in the housing collapse and resulting market meltdown, for receiving a public bailout and not providing struggling taxpayers with one in return. But throwing lenders to the lions will hinder rather than help Southern Nevada's economic recovery.

The Nevada Supreme Court put banks on notice earlier this month when it ordered, in two separate cases, that lenders bring all important documents to mediation and identify an available representative who has the authority to modify a mortgage. The court told Clark County District Judge Donald Mosley and Washoe County District Judge Patrick Flanagan, who review failed mediations, that they must sanction lenders who break these rules, the Review-Journal's Doug McMurdo reported Monday.

In response, Reno attorney Terry Thomas asked that Judge Flanagan impose a $1 million fine against a lender found to have acted in bad faith by a mediator.

Someone stops paying his mortgage and a lender who enforces the terms of that contract by foreclosing can be sanctioned for acting in "bad faith" -- and face fines many times larger than the note itself?

The foreclosure mediation program is well-intentioned, but it constitutes massive government interference in contract law and property rights and allows people to game the system. It has created perverse incentives for homeowners to stop paying their mortgages, not because they can't afford their payment, but because they want out of a property that's worth half what they owe and "they want the same deal their neighbor got," said Bill Uffelman, president of the Nevada Bankers Association.

This has created a huge chasm between homeowners and renters dealing with financial hardship. If a renter stops paying the rent, a family can be evicted and put out on the street within a couple of weeks. A homeowner, meanwhile, can remain in a home for months -- years, in some cases -- without making a mortgage payment.

As Mr. Uffelman points out, the "junk mortgages Countrywide and WAMU and others were so good at being bad at are gone." Today's new foreclosures overwhelmingly result from unemployment and underemployment. In some cases, a bank might decide a loan modification makes sense, especially if a household still has some income and a revised payment schedule would bring better returns than a depressed foreclosure sale. But why should a bank be compelled to modify a mortgage if the homeowner can't find a job?

Judges Mosley and Flanagan must be very careful in handing out sanctions. Credit in Nevada is too tight to withstand further redistribution through the courts. And lawyers and homeowners shouldn't get additional rewards because a mortgage wasn't paid.