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 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)