When Mike and Dana bought their first home, they viewed it as a new beginning. Like most couples, they financed the purchase with a mortgage. Everything was going well until Mark lost his job. After that, the two could not afford to make payments. Within six months, the bank filed a foreclosure suit.
Luckily, Mike and Dana still had a shot to keep their home. New Jersey has a “mediation” program for residents facing foreclosure. The mediation program requires the bank to negotiate in good faith to try and work something out. The process is run by a court-appointed mediator.
Unfortunately, negotiations broke down when the bank flatly refused to modify Mike and Dana’s mortgage in any way. According to the bank’s internal policy, the fact that the couple’s income had unexpectedly dropped was not enough to justify a loan modification. This despite the fact that Mike and Dana had little other debt. The bank refused to negotiate further based on a factor outside of the couple’s control: the value of the property had gone down.
Mike and Dana filed a court motion to dismiss the foreclosure. They argued that the bank failed to negotiate in good faith. The bank responded that, because it had followed its own internal guidelines, it was automatically acting in good faith.
The judge rejected the bank’s self-serving rationale. He refused to decide the matter based on rules that the bank itself set. The judge ruled that a bank has to prove that its guidelines are reasonable.
Therefore, the bank was left with two options. It could go back to the negotiating table with Mike and Dana, or it could try and prove the reasonableness of its guidelines in court.
I agree with the judge. Considering that the mortgage banking industry played such a large role in plunging this country into the “Great Recession,” we cannot trust a bank to act reasonably, just because it says it will. Like pets and children, banks need a little supervision.