Can a Bank Foreclose if You are Paying Your Mortgage? Sometimes they can.

From Slate Magazine, November 7, 2010

The mortgage debacle in the United States has raised deep questions about "the rule of law," the universally accepted hallmark of an advanced, civilized society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America in the wake of the subprime mortgage crisis, it has done neither.


Part of the rule of law is security of property rights: If you owe money on your house, for example, the bank can't simply take it away without following the prescribed legal process. But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts.


Read the article at http://www.slate.com/id/2273916/

Do the foreclosure watchers/commentators imply that the banks are now repossessing homes at random?  Do the banks REALLY take the homes away from PAYING borrowers.  Not that the banks DON'T foreclose on the properties when a borrower is paying.  They do.  But it is a bit more complex than the article makes it to be.  Here is where the things actually get murky:

         1.  Johnny Q Homeowner applied for modification
         2.  Now Johnny is sending a lower payment to the bank because the bank agreed to a modification.
         3.  What Johnny probably does not understand (and no one usually bothers to tell him) is that these payments are NOT applied to his mortgage.  They are deposited in an escrow account.

        4.  For example:

• Johnny's pre-modification monthly payment is $1000/month.  
• His temporary modification is at $500/month.  
• In month 1, Johnny sends a payment for $500.  
• This money is deposited into an escrow account.  
• In month 2, Johnny makes another payment of $500.  
• Now there is $1000 in the escrow account, and this amount is applied to cover the deficiency for the first month.  
• In month 3, Johnny makes another payment of $500.
• At the end of the third month, there is a two-months deficiency because the first two payments were applied to month 1, and the third payment is in the escrow account.
• As far as the bank is concerned, Johnny has not paid his mortgage in TWO MONTHS (although he actually he did!)

If Johnny is not approved for a permanent modification at the end of the trial period (and we all know that the approval rate for permanent modifications is miserably low), the bank (and this happens very frequently) will foreclose on Johnny's mortgage claiming that he has not paid them in two months!  Johnny can reinstate his mortgage by paying the $1,500 deficiency, but he probably does not have the money (and usually the deficiency is much greater than $1,500 because temporary modifications have a tendency to linger for almost a year before the permanent modification is either approved or denied).  So now Johnny is out of his house even though he PAID HIS MORTGAGE.

However, it is VERY unlikely that a bank will foreclose on someone who is paying the proper amount on time.  And if it happens, SUE THEM!