For homeowners who are not behind on their mortgage yet, but are worried about falling behind, it may seem that their bank is acting quite illogically. Most banks refuse to accept a short sale or modify the terms of a mortgage unless the owners are numerous months behind in payments. The homeowners come to the bank to ask for help to avoid foreclosure before it happens, but the bank says they can not offer any actual programs until there is a real danger of foreclosure. But by this time, the homeowners may not even qualify for a solution because they are too far behind.
Unfortunately, systemic stupidity and shortsightedness are not crimes in America (yet), so the banks are able to get away with this circular logic which pushes people into foreclosure in order to save their homes from foreclosure. In such cases, the owners of properties may feel like they have very few legal resources available to them. They are right to feel this way, as the courts can be very inhospitable to homeowners trying to work out a solution to foreclosure without actually being in default.
In essence, their legal resources probably involve very little more than negotiating with the lender to change the contract as written. But this brings into play the situation where the bank refuses to negotiate the mortgage there are no missed payments. Thus, homeowners who make payments on time are rewarded with no extra help when attempting to sell in a down market, while those who are unable to pay the mortgage are given numerous concessions which may lower the rate or allow them to sell for less than the total amount owed and help them stop foreclosure.
If the homeowners have any evidence the mortgage company has not been keeping up its end of the mortgage contract, they could sue the bank for defaulting on the contract and try to discharge the mortgage loan entirely. Obviously, banks and courts do not look too favorably on this, even if the bank has committed egregious acts of mortgage fraud or servicing fraud. If homeowners could prove that banks are criminal organizations and have their mortgages discharged, politicians and bureaucrats who receive much of their power from the banks would be quite threatened. So this legal resource is open in only a very small number of blatant cases or class action lawsuits.
The possibility of mortgage fraud may be present if the homeowners were given a really shoddy loan and not informed of various aspects that would cause penalties or higher payments. For example, many states still allow the bank to attach a prepayment penalty if the loan is paid off too quickly, and many homeowners are coming out and stating they were not aware of receiving adjustable rate mortgages until their payment doubled. If they signed a piece of paper disclosing these types of aspects but did not ever bother to read that piece of paper, though, they might be out of luck showing how they were tricked into a particular mortgage.
Otherwise, homeowners in these kinds of situations could use the legal resource of bankruptcy to stop foreclosure to establish a payment plan for the housing debt and unsecured credit lines, but that would not make sense since this article is about those who are not yet behind on the mortgage. Bankruptcy is a legal method for dealing with a mortgage loan and other creditors, but it would not be appropriate for people who are not behind, since judges are not currently able to lower the total amount owed to reflect the current market value of a house. There is some talk in Congress to change this and allow judges to adjust the total debt, but it is unlikely to result in any more than talk.
Unfortunately, getting a second home that is more affordable and letting the first one go into foreclosure might be the option that stubborn banks push homeowners to consider. Seems a bit ironic since the lender will be hurt much worse in this situation than the homeowners. But if the homeowners are not far enough behind on their mortgage to qualify for a solution, but will not be able to keep their home for much longer, and it is unlikely the bank has done anything legally wrong (and stupidity on the part of a bank is perfectly legal, or else we wouldn’t be able to have banks), homeowners have very few legal options to make the lender negotiate on a mortgage that is not in default.