Bankruptcy attorney Diane Drain shares her views on the foreclosure crisis and news that some lenders have been taking potentially fraudulent shortcuts to speed-up the foreclosure process.
Ted Simons:
Foreclosures in Arizona are down 2% from the same time last year, but according to Reality Trac, the state still has the second highest foreclosure rate in the nation, second only to Nevada. In recent weeks, some lenders have placed a freeze on foreclosures. That in response to news that lenders were taking potentially fraudulent shortcuts to speed up the foreclosure process. Here with her perspective on the issue is Diane Drain, a bankruptcy attorney. She also teaches at the Arizona school of real estate and is an adjunct professor at the Phoenix school of law. Good to see you again.
Diane Drain:
Thank you.
Ted Simons:
When we talk about these moratoriums, I know Arizona isn't quite the same as other states regarding foreclosures. Let's make -- try to clear that up.
Diane Drain:
There are 23 states in the union that use a judicial foreclosure process. Those are the ones we're talking about having the moratorium. The other states all have another option called a trustee sale. So that is how Arizona produces the majority of all of its foreclosures, is this statutory automated process called a trustee sale. So the forbearances -- the moratoriums don't apply to Arizona when it comes to our normal path for trustee sale.
Ted Simons:
But I did read that Bank of America was putting a hold on some or a lot of trustee sales.
Diane Drain:
Correct.
Ted Simons:
OK. So there is an impact just kind of a corollary impact?
Diane Drain:
I have a feeling that perhaps the banks are a little on the scared side about the consequences of their behavior, and to anticipate potential litigation issues, they're putting things on hold for a while.
Ted Simons:
Talk about their behavior. There are some who are saying that it was just -- it was errors, error were made with these signings, others are saying that's fraud, and they're saying a lot of other stuff going on. What do you see?
Diane Drain:
Certainly when the number of loans that went into default cyst hit the system, the system was ill-equipped to handle it. It's just huge nationwide. As a result of that, as with any employee, when they're trying to mass produce paperwork, they don't necessarily follow the rules, the written rules of the employer. And so it wasn't unusual that people would start to short the system and not deal well with planning ahead, and being proactive, instead they become -- they become more reactive to stresses.
Ted Simons:
So rubber stamping, more rubber stamping than you think out and out fraud?
Diane Drain:
I think so. I truly don't believe -- having been through this when we had the RTC situation in the '80s and having at that point managing one of the larger lenders in Arizona, and I know what went on, I'm really looking at this -- it's probably the same situation, it was just overworked employees without enough staff, without enough supervision, and control from the management. They just did their very best, and unfortunately it went haywire. And then no one came in to shut them down, when they realized this wasn't a surprise, this robo-signing, it wasn't a surprise it was going on. They knew they shouldn't be doing it.
Ted Simons:
So -- hmm. Lax, but not to the point of super --
Diane Drain:
I wouldn't use fraud. I really wouldn't. The problem is, the people that were harmed are the homeowners. The folks who feel like if only people had worked with them for a little bit longer, maybe they would have been able to save their house.
Ted Simons:
Talk to us more about that. Because -- and we can talk about the foreclosure area as well, but also with loan modification. A lot of folks were seeing the villains with the banking industry as far as foreclosures, they're seeing them as far as the fact they can't or somehow having trouble getting their loans modified.
Diane Drain:
Right. When I get those calls I start first with -- the lender's only contractual obligation is to accept your payment. And your contractual obligation is to make it. And if you think you can make the lender do something that the contract doesn't provide for, then the lender could discretionally do something, but you can't make the lender do something. When you add more layers into that, the federal policies, all of our federal programs, and such, whether you're a Fannie Mae or Freddie Mac loan, whatever it is, it starts to make it more complicated. But the reality is that the borrower has to understand, this is a discretionary process for the lender. And when you have an overworked lender with not enough staff, with not enough authority for their staff to make wise business decisions, the poor homeowners who are faced with losing their home are thinking somehow this is a scheme to take their home away from them. It's just people don't have time to deal with it.
Ted Simons:
So we've got the foreclosure problem. We've got loan modifications that either aren't happening or aren't happening quick enough or not happening effectively enough, how is that playing into bankruptcy rates in Arizona?
Diane Drain:
Right now bankruptcy is doubling every month over the year before. The same month the year before. And that's Arizona statistics. So it's huge. And what we're seeing right now is that those folks who have been trying to hang on for an awfully long time thinking they could stay the course and that the market would get better here, they're now coming to realize they can't get better. At least not for a while. So they've stopped taking money out of their 401(k)s, they're now looking at, let's just file bankruptcy and get on with life.
Ted Simons:
Can you file your bankruptcy and get on -- how long before life gets on?
Diane Drain:
Very short time after filing bankruptcy. Some of my chapter 7 clients, which are the simple and quick bankruptcies, are telling me they're getting preapproved credit cards literally within days after having filed their bankruptcy.
Ted Simon:
Doesn't that seem unusual to you?
Diane Drain:
No, think about it from a creditor's standpoint. They don't owe debt anymore. And if they're hooked, literally addicted to the use of credit, who better to hook again, but somebody who does haven't any more debt.
Ted Simons:
Why does that seem wrong? That doesn't seem right.
Diane Drain:
I agree. I ask my clients to take a year off using credit. And just use debt cards.
Ted Simons:
Everything we've talked about from foreclosure to loan moratorium, especially the foreclosure problem, the foreclosure moratorium in some areas with some lenders, what does that do to the confidence of the buying public?
Diane Drain:
OK. So what I'm hearing generally, the folks who can afford to pay their bills are currently saying they're not going to use credit anymore. They're tired. They're tired of watching their family be hurt, they're tired of watching their friends be hurt, because of the unemployment situation, or the real estate crisis, and they're just not going to be using credit the way they used to. They're not going to be out buying the big-screen TV. They're cutting down on it. I think people are smarter today. I send everyone to FTC.GOV to pull all the articles that they can about the use of credit, and how to plan for it, so if they've got questions about loan modifications, go to HUD. Hud.GOV. And just look to all the resources that are available through the government. Don't pay somebody to do this stuff, because it ends up playing back into all these loan modification scams, and such like that.
Ted Simons:
All right. Good information. Thank you so much for joining us. We appreciate it.
Diane Drain:
you're welcome.
Diane Drain:Bankruptcy attorney;
