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It is a question that I hear from my clients almost daily, "Why doesn"t the bank just reduce my payment, instead of losing all that money?". When taken at face value, it seems to make perfect sense. Rather than foreclosing or allowing a short sale, shouldn"t banks preserve their assets by modifying struggling borrowers? The answer seems obvious, but the answer is not that simple.
Contrary to most opinions, banks are not stupid. They know that, regardless of interest rate, a homeowner who owes significantly more than the value of their home is at very high risk for default. Approximately half of homeowners, that received some kind of loan modification or payment assistance, have already defaulted. With that in mind, lenders do not look at modification as anything more than a band-aid. It is an even money bet that the homeowner who receives the loan modification will be right back in default within a very short period of time. As such, they need to be very cautious about handing out loan modifications without a great deal of scrutiny.
Most folks have noticed that there are far fewer banks than there were a few years ago. Wells Fargo took over Wachovia, Washington Mutual was gobbled up by Chase and Bank of America swallowed the poison pill better known as Countrywide. Those are just the ones that make national headlines! Large banks and even the FDIC have been taking over mortgage assets left and right since 2007. These enormous mortgage portfolios have been acquired at breathtaking discounts. Chase took over Washington Mutual for approximately 98% less than the face value of their outstanding mortgage dollars! If they foreclose or allow a borrower to sell short, they are still making an incredible profit.
Finally, banks are just like you and I in some ways. They have to borrow money the same way we do. Every time they lend money out, they need to either pay their own depositors or borrow the money from the federal reserve. The loans that they obtain are for very short terms and very low interest rates. These loans are subject to interest rate fluctuations just like all loans are. If they agree to reduce a borrowers interest rate down to 2% for five years and interest rates increase in the next few years, they are still locked in to the terms of that modification. It may seem like a great deal for a homeowner, but leaves a great deal to be desired for a stockholder!
As a Realtor, I rely on an active real estate market to make my living. If there were a push for lenders to reduce the principal balance for borrowers nationwide, that would prevent the resale of these homes to new buyers. Not only would that mean billions in lost wages for real estate agents, escrow officers, insurers, pest control companies, home inspectors and numerous other businesses involved in home sales, but it would also reward homeowners who made poor financial decisions by allowing them to virtually purchase their homes all over again for less money and below market interest rates! Discouraging or declining loan modifications may not be a very popular practice by our country"s lending institutions, but it is exactly what the American economy needs to speed its recovery.
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Source by Jeremy Colonna
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