The automatic stay is the hallmark of bankruptcy, so when the judge lifts the stay to permit a lender to foreclose, we tend to think the curtain has come down on our client as homeowner.  Well, maybe not, or at least, not yet.

In some cases, the road to foreclosure seems to be a wandering path rather than an expressway.  Case in point:  relief from stay was granted in my client’s case on April 15th.  The notice of default, the first step in the statutory foreclosure process, was not recorded until six months later.

Those six months are months the clients lived payment free in the house.  They continue to try to wend their way through the lender’s loan modification process.  Even if they aren’t successful in getting a modification, it will be at least another 4 months before the lender can hold a foreclosure sale.

This is a recent example that reinforces a story I’ve told before, about the client who moved his family out of their large comfortable home as soon as he saw they could not keep it.  They rented a house, and worked on preparing for a bankruptcy filing.  More than a year later, when we were ready to file, the lender had still not taken the first step in foreclosure.  Twelve months the client paid rent, when he could have stayed where he was, at no cost.

Falling home prices have lead to a surge of strategic defaulters, in real estate columnist Kenneth Harney’s words:  people who abruptly choose to stop making mortgage payments.  These folks have made an economic decision that continuing to pay on a house that is significantly underwater does not make economic sense.

Harney is clearly bothered by this choice by people who appear to be able to make the payments, but elect instead to default and lose the property.  In this and an earlier column, he raises the question of the morality of  elective mortgage default.

I’ve been chewing on that idea:  is there a moral issue when a borrower voluntarily defaults?  The law attaches  consequences to certain promises, such as the promise to repay money borrowed.  If the borrower is capable of repaying but does not, is that a moral failing?  Or is it nothing more than the weighing of the consequences of shunning a legal duty vs. the cost of performing the promise?

I tried thinking about this from the lender’s side of the transaction:  are there any moral obligations that the lender assumes when they make the loan?  Could the lender exercise a legal right (to foreclose, say) and yet violate a moral precept?  (All of this presupposes that corporations have morals, or moral duties, of course.)  Would a lender have a moral obligation to modify a loan in the absence of a legal obligation?

Or, is all that is involved in the mortgage loan transaction the undertaking to expose yourself to certain unpleasant consequences if you default?

It bears more thought.  I routinely ask bankruptcy clients whether it makes sense to continue to pay on mortgages where the loan balance is significantly greater than the property’s value.  I want them to consider the option of walking away in the course of the bankruptcy.

I saw another facet of the underwater home mortgage when my client was considering whether to cure the mortgage arrears or walk away.  If he cannot hang on to the property until it regains the $85,000 negative, he will not be able to sell the property in the future without the active cooperation of the lender for a short sale.  After our current experiences with lenders and underwater properties, who wants to bank on that?

The homeowner was a single man and the property was a one bedroom one bath condo.  Life wouldn’t have to change much before a 1 and 1 is too small for a married man.  He’s filing bankruptcy now and will take the credit hit and get on the way to a fresh start.

If he elects to keep the condo and cure the arrears, he sets himself up for another possible credit hit when he needs to sell a property still underwater.

Logic and reality have been bouncing off my clients’ deflector shields recently on the issue of their houses.  Confronted with the gap between their income and even the payment on a modified loan, I get the refrain, “But keeping the house is the most important thing in my case!”

Yes, and how do you expect to do that?   I get no meaningful answer.

This house business has become so irrational and  embedded that I’m thinking it’s a resistant strain of something. (Is there a strain of “Home Flu”?)   “House” or “home” is like God or motherhood:  a positive one dare not challenge with words about economic reality.

What’s interesting about these reactions is that seldom are we talking about the long standing family home.  We’re talking about houses purchased in the past  five years or so.  Which of course corresponds to the frantic run up in Bay Area home prices.  So these homes were, from the beginning, never likely to be the family seat.

How do I persuade people that a home is simply housing, and what’s really important are the people who live there?

The time between a notice of default on a mortgage loan and foreclosure now averages 176 days.  California law requires only 112 days.  So, while the number of defaults is increasing, the interval between the statutory notice of default and actual sale is also increasing.

Before the recent crisis, lenders typically issued a notice of default after three missed payments, and marched fairly briskly to a foreclosure sale.  I’m now seeing longer periods before initiating foreclosure and even voluntary postponements of sales by the lender.

This trend is particularly important to those who have decided to let the house go to foreclosure.   Where the loan terms are impossible, and without the possibility of modifying the loan in Chapter 13, or the income stream has shrunken, homeowners are trying to calculate how long they can remain in the house before title to the house passes to the lender.

Sadly, in this economy, for many homeowners the only return they will see on their investment in a home is the right to live there, payment free, until the foreclosure.

Quick:  how is a small Tennessee town like a California family facing foreclosure?  The New York Times suggests it’s because they were both sold risky financial products to meet their borrowing needs.  The unemployment-wracked town of 11,000 was not told about the interest rate risk in the bond derivatives that financial advisors promoted and sold the town.  The interest payments on the town’s bond debt have quadrupled.

That’s essentially the same story I hear from clients with adjustable rate, pick a payment loans on their homes.  The financial professionals advising them talked only about the immediate consequences of the loan, and downplayed the risks.  Over and over, clients tell me that when they questioned the broker about how they were going to make the full principal and interest payment, they were assured the broker would get them a better loan before any damage was done.

Why is it that politicians opposing mortgage modification in bankruptcy want to demonize the unsophisticated borrower without regard to the supposed professionals who sold and profited from these exotic financial products?  Are we going to hear that the city council of Lewisburg, Tennesee bought more sewers for the town than they could afford?

When are we going to put our energies into a solution to the foreclosure crisis, rather than finding a scapegoat?

The banking industry is swarming over Capitol Hill in an effort to gut or defeat S. 61, the Helping Families Save Their Homes Act.  The latest tactic is to try to limit the loans that can be modified in bankruptcy to sub prime loans.

These Senators are thought to be undecided or subject to being swayed one way or the other:

Max Baucus – Montana

Robert Byrd – West Virginia

Tom Carper – Delaware

Tim Johnson – South Dakota

Mary Landrieu – Louisiana

Joe Lieberman – Connecticut

Blanche Lincoln – Arkansas

Claire McCaskill – Missouri

Ben Nelson – Nebraska

Mark Pryor – Arkansas

Jon Tester – Montana

The freshman Democratic Senators have no history with this issue:

Mark Begich — Alaska

Michael Bennett – Colorado

Roland Burris – Illinois

Kirsten Gillibrand  — New York

Kay Hagan – North Carolina

Ted Kaufman – Delaware

Mark Udall – Colorado

Tom Udall – New Mexico

Mark Warner – Virginia

A few Republicans

Bob Corker – Tennessee

Richard Lugar — Indiana

Mel Martinez – Florida

Arlen Specter — Pennsylvania

George Voinovich — Ohio

If you or family or friends are constituents of any of these lawmakers, give them a call or email in support of a no cost opportunity to stop the housing collapse.

Call them toll free: 877.354.4958

Or email at: www.nacba.org/TellCongress

Ask them to support a strong and comprehensive judicial mortgage modification buill.

Legislation attached to the long delayed California budget halts foreclosures on family homes in a move designed to accommodate loan modifications.

According to the Legislative Analyst, the bill

• prevents issuance of a notice of sale under CA foreclosure law for an additional 90 days beyond the statutory reinstatement period
• applies only to first mortgages on homes that are the primary residence of the borrower when the default occurs
• covers only loans recorded between 2003 and Jan. 2008
• exempts servicers who have a qualifying loan modification program in place

From my perspective, the standards in the bill for a qualifying modification program are not very high and there is no requirement that  they are applied in a way calculated to actually modify the loan.

But half a loaf is better than where we are today.

Spokesmen for the banking lobby expect the world to stop spinning if bankruptcy judges gain the right to modify home mortgages. They construct a parade of horribles if a contract between a lender and a borrower is altered.

What they don’t explain is why this very same power to modify mortgages has not crushed the market for rental property, second homes, and commercial buildings. A bankruptcy plan can, today and for decades past,  change the terms of a loan on any of those kinds of property. Last I looked, the world was still turning.

The prohibition on altering the terms of a home loan is a 1984 addition to the bankruptcy law enacted in 1978. It is a special carve out for the home lending industry. Congress was told that it was necessary to promote home ownership. Perhaps a change is necessary to preserve home ownership.

My veterinarian father used to say that a goose is so stupid that it wakes up in a brand new world every morning. He probably didn’t know any lobbyists.

The NBC Sunday morning new shows  were again talking about moral hazard as applied to efforts to stem the tide of foreclosures.  This concept looks at the message we send when we rescue a homeowner who took out a bad loan and give nothing to the prudent homeowner who didn’t take an exploding ARM loan.

Should I thwart efforts to bail out my next door neighbor who was foolish because it rewards the fool, and gives me nothing?

Personally, in these circumstances, I am not offended by mortgage bailouts.  Seems to me to argue that the improvident (or the simple) should pay the price by loss of their homes to preserve the high moral ground for those who didn’t succumb  is short sighted.

If my neighbors lose their homes in foreclosure, the value of my house goes down.  If several neighbors lose homes, I’m neighbor to the bank’s REO department and the neighborhood becomes at best less sociable, at worst, less safe.  I don’t count on the bank in the house next door to loan me a cup of sugar.

The beauty of the bill to permit judicial modification of home mortgages is that it costs the taxpayer nothing; preserves families and neighborhoods; and merely recognizes the loss in home value that the homeowner and the lender have already experienced.

I’m perfectly OK with that.