Long Island Judge Wipes Out Homeowner Debt. Victory for Consumers? Or Is It?


Last week a judge on Long Island wiped out a homeowner’s debt to Indymac Bank. (article) Many consumers are absolutely giddy over winning one against the “greedy” banks. What consumer wouldn’t want to have their own mortgage wiped out? It’s akin to finding a bag of money that fell off of an armored truck. While it certainly is a win for the borrower who benefited from the judge’s decision, is it really good for the rest of us?

Just the Facts

The homeowner in question purchased the house 15 years ago and refinanced in 2004 by taking out a sub-prime interest-only adjustable rate loan. The loan had an initial rate of 10.375%, which subsequently adjusted to 12.375%. The article states that the rate “soared”, but 2% is a typical adjustment. The borrower has no equity in the home and stopped making payments at one point.

Before jumping to the conclusion that the borrowers were duped into taking out a risky loan, take a look at them. The primary borrower is a college professor of English and cognitive reason, obviously a person of some intelligence. This is someone who is certainly capable of reading the terms of the loan and requesting clarification on points that weren’t fully understood.

The bank wasn’t exactly innocent in this either. It is the borrower’s contention that medical problems caused them to fall behind on their payments. They claim that they made attempts to modify the loan only to be rebuffed by the bank. The bank refused to consider the hardship and proceeded with foreclosure proceedings.

The Ramifications

The judge called the bank’s collection attempts “harsh, repugnant, shocking and repulsive” and ordered the debt to be cancelled. The problem is that the borrowers and the bank had a contract. That contract obligated the borrowers to repay but did not impose any obligation on the bank to modify the loan terms. The judge acted out of anger to punish the bank rather than rule strictly on the terms of the contract.

The lender is going to appeal the ruling and the consensus of experts who have chimed in seems to be that the judge’s decision will be overturned. The judge is clearly “legislating from the bench” in this matter. Unfortunately that is not his job, he is merely to apply the rule of law.

If this ruling stands it will have an effect on all future borrowers. If lenders have to worry that their loan contracts may not be upheld they will have no choice but to factor that into their lending decisions. That means higher rates to cover the new risk and would make loans even more difficult to obtain than they are now. Once again, there is no free lunch.

Judicial abuse occurs when judges substitute their own political views for the law. – Lamar S. Smith (Congressman)

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  1. Amen, Brother.

    There is a massive witch hunt going on in this country to decide who is responsible for the housing bubble. No one wants to put any blame on the people who bought the houses that drove up prices that outpriced many potential buyers who are now paying to bail out the people who drove prices beyond their reach.

    Borrowers don’t deserve all of the blame but they do have a fair share.

    Before you start to celebrate this decision, victorious consumer, just be aware that if a lender cannot collect from one person they’ll get their money from others. Citi bank and Chase just doubled my interest rate on my credit card. I pay my bills, I have money in the bank. I canceled the cards. They’re forgiving so much debt right now that they have to get money somewhere. It is clear that they are in servival mode. They don’t care if I pay off the balances and cancel the card, they just need that cash.

  2. I know from expeirence that Indymac is one of the worst banks to work with when trying to get a modification. But like you say in your blog this will be turned over in appeal. I am pretty sure that the borrower knew that his loan could adjust….I bet you anything he was sold on the idea that his property would continue to rise and he could refinance into better terms. Back in 2002-2005 we would call loans like this bandaid loans. Then We would put them into a 30 year fixed 6 to 12 months later.

  3. One article, one author, four follow up comments. All five are sympathetic to the bank’s
    plight. 10.3 % unemployment, an economy on life support, de-regulation on steroids,
    gambling in the form of collateralized debt obligations. But they are exorcised over a homeowner “who claims” that medical problems cause their financial hardship..hmm…?
    Shame on those greedy, and irresponsible home owners that took the money and ran. Shame
    on those people that took advantage of the those poor financial institutions, like AIG. How
    dare any those commie do gooders talk of regulating those poor banks, like Goldman Sachs. I say hell no. We should continue to allow the market to determine every single aspect of our existence. We should continue to socialize the risk inherent in capitalism, and privatize the rewards. We must protect the banks. The banks know best. The banks are smarter than us. If people haven’t heard of universal default, it’s because they are just retarded. Usury is a dirty word that has thankfully been cleansed from our vocabulary. I love the banks, I love the hedge funds. This country is strong because of banks not people. That’s why I think we must continue to discourage any talk of protecting the consumers from so-called greedy banks. If a person is too stupid to know the intricacies of their credit card agreement, two inches of mortgage documents , that is their own fault. we need to move in a direction were everything is monetized. All police force, fire department, education, and the air we breath should all be privatized. It’s just not right, there should be no tax at all.

    We should forget about electing people and just agree to allow the banks to run our country and our lives. Think of how much more better off we’d be if we’d elected Goldman Sachs as our commander in chief. This would definitely be a better option for the banks because they would not have to waste anymore money, picking our politicians.

    • Haha. Right on Gary.
      Why is it banks and corporations are allowed to have hardships, but people are not?
      When I was buying a house, the bank and the broker and the lawyers all tried to rush me and discourage me from reading the paperwork. I was led to believe it was “formality.” I insisted on reading it anyway, to discover it was all full of mistakes, blanks, and outright lies. When I said I would not sign, I was told it was not negotiable and I had no right to back out because my realtor, Keller-Williams, did not put a contingency stating I had a right to refuse the loan terms if I did not agree (I never bought a house and would not have known I needed that. In fact, I never felt I had made any kind of committment, never having seen the terms of the loan or even been formally told I was going to be granted the loan.)
      I still refused to sign. They threatened to sue me, but did not. They sent papers which appeared official with a “copy” stamped on it in red and a bogus court number. This is how the professionals behave?

  4. I read a lengthy exchange of threads the other day on a different REI site that said short sales probably aren’t necessary to prevent foreclosures. This one real estate consutlant is saying that because mortgages get sold so many times, all you have to do in Federal court is ask for the loan servicer to show the note. Of course they can’t prove they have the original note – they can’t find it.

    I though it was very interesting argument. Although the borrower entered into a contract (the mortgage) and couldn’t prove they paid it in full, they’re able to stop repaying their obligation because of sloppy paperwork and record keeping, on the part of the lenders.

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