Why Banks Prefer Foreclosures over Mortgage Modifications

At the center of most efforts to provide relief to struggling homeowners is an attempt to take on a single housing paradox: Banks get a much better return on a mortgage modification than they would on a default, foreclosure, and sale, and yet banks renegotiate only a tiny share of seriously delinquent mortgages—only 3% or so. This is money left on the ground, and the key to helping homeowners would seem to be knocking down whatever is standing between banks and this opportunity for mutual gain.

That whatever, in most tellings, is securitization. The pooling and chopping of mortgage payment streams that is part of the securitization process would seem to pose a significant structural barrier to loan modifications. But is this actually the case?

A new paper (.pdf) by Federal Reserve economists Manuel Adelino, Kristopher Gerardi, and Paul Willen argues that securitization is a red herring. They note that there is no significant difference in the rate of renegotiation of banks' securitized loans and other, non-securitised loans held in bank portfolios. Whatever is keeping banks from modifying delinquent mortgages, it's affecting all delinquent loans.

In fact, Messrs. Adelino, Gerardi, and Willen argue that the real mistake is a misstatement of the initial paradox. If banks aren't taking advantage of an opportunity to increase the return on loans by modifying terms, then perhaps that's because no such opportunity exists:

We argue that the data are not inconsistent with a situation in which, on average, lenders expect to recover more from foreclosure than from a modified loan. At face value, this assertion may seem implausible, since there are many estimates that suggest the average loss given foreclosure is much greater than the loss in value of a modified loan. However, we point out that renegotiation exposes lenders to two types of risks that are often overlooked by market observers and that can dramatically increase its cost.

The first is “self-cure risk,” which refers to the situation in which a lender renegotiates with a delinquent borrower who does not need assistance. This group of borrowers is non-trivial according to our data, as we find that approximately 30 percent of seriously delinquent borrowers “cure” in our data without receiving a modification. The second cost comes from borrowers who default again after receiving a loan modification. We refer to this group as “redefaulters,” and our results show that a large fraction (between 30 and 45 percent) of borrowers who receive modifications, end up back in serious delinquency within six months. For this group, the lender has simply postponed foreclosure, and, if the housing market continues to decline, the lender will recover even less in foreclosure in the future.

Once both types of risk are taken into account, the expected return on a loan modification is likely to be lower than the return to foreclosure. If this is, in fact, the case, then the problem facing policymakers is much more difficult than previously imagined. Helping borrowers can't merely be accomplished by clearing away some institutional barrier to a means to mutual gain. Banks are sending these loans into foreclosure for good reason, and taxpayers would have to pony up some serious cash to prevent banks from doing so.

This article originally appeared on The Economist.com

Comments

[MinAkkar20:]

Thanks for bringing that paper to light. Although I feel the data is too young to have a reliable regression (which I feel is an oxymoron anyways), there are two items I would like to see in the tables of data:

1) are banks and servicers more likely to keep good mortgages on their books and securitize the shoddy ones? (if I missed that please point it out) If this is true, then the fact that they have similar modification percentages would indicate that securitization deters modification because those riskier loans are more likely to default.

2) They don't seem to account for the number of people who don't want a modification. Who wants a principal + term increase or even interest rate reduction modification on an underwater home (similar to today's WSJ op-ed)? How are these people concentrated between securitized loans and those on-the-books?

Just as the authors say the proof is in the data, the proof is also in the legal contract: one tranche has nothing to lose from a foreclosure, while another tranche has everything to lose. We've seen anectodal evidence of this in the commercial mortgage area where the "tranche warfare" has resulted in lawsuits over foreclosures between different investors.

Jul 08 07:53 AM

[Marie Antoi...:]

"Are banks and servicers more likely to keep good mortgages on their books and securitize the shoddy ones?"

The answer WAS yes, but the collapse in the market over the past two years forced lenders to securitize even the good loans on their books (many of which have since gone bad). I don't think it was part of the plan, but now nearly everything is securitized and good loans are tainted by bad.

As for the original study, I haven't read it but it seems to suffer from circular (il)logic on the banks' part: most loan mods go bad so we give fewer/worse mods which are still more certain to go bad in the future. That's why loan mods don't work.

Also, some people who don't need mods ask for them, then "cure" themselves, so they didn't really need them. Is there a longitudinal aspect to that data (as in, does the "cure" last around 6 months, then the patient dies on the default table?)?

Finally, who paid for the study and what are its inherent biases?

Jul 08 08:49 AM

[Marty Boardman:]

A true loan modification must include a principal balance reduction that reflects the current market value of the home. If all the lender is willing to do is reduce the interest rate of the loan, extend the loan period from 30 to 40 years and tack on the arrears then of course the redefault rate will be high.

The borrower may have a more affordable payment. However, they have a mortgage that is so underwater it could take decades to pay off. This makes borrower nothing more than a glorified tenant. Eventually reality sets in and they just walk away.

Jul 08 08:56 AM

[Joe Adamaitis:]

As an FYI and to compliment your article:

Lenders Avoid Redoing Loans, Fed Concludes; Study Cites Lack of Profit in Aiding the Distressed

Boston Globe, By Jenifer B. McKim
July 7, 2009

Mortgage lenders don't try to rework most home loans held by borrowers facing foreclosure because it would probably mean losing money, a study released yesterday by the Federal Reserve Bank of Boston concludes.

The Boston Fed's findings suggest the Obama administration's major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.

One of the study's coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.

"Loan modification is not profitable for lenders," Willen said. "If it were profitable, they would go out and hire staff."

US Representative Barney Frank, head of the House Financial Services Committee, said the study results may provide answers about why so few struggling homeowners have been able to get help.

Frank, a Newton Democrat, said he is holding a hearing Thursday on his proposal to provide government loans to homeowners who have lost their jobs and can't qualify for loan modifications and other help because they don't have income.

"The problem is worse than we thought," Frank said. "The failure to do these modifications means the whole situation stays bad longer."

The Fed's study found that only 3 percent of seriously delinquent borrowers - those more than 60 days behind - had their loans modified to lower monthly payments; about 5.5 percent received loan modifications that did not result in lower payments.

The study focused on 665,410 loans that were originated between 2005 and 2007 and subsequently became seriously delinquent. It also followed about 150,000 borrowers for six months after they received help, through the end of 2008.

The lenders may have compelling reasons not to find new borrowers to help, according to the study. For example, up to 45 percent of borrowers who did receive some kind of help on their loans ended up in arrears again, the study found. Conversely, about 30 percent of delinquent borrowers are able to fix their problems without help from their lenders.

"A lot of people you give assistance to would default either way or won't default either way," Willen said. "They are trying to maximize profits, and at this point maximizing profits does not mean modifying loans."

Officials from Hope Now, the private-sector alliance of mortgage servicers and investors, were unavailable for comment yesterday.

US Treasury officials declined to comment on the Fed study, but noted in a statement that more than 240,000 homeowners have received loan modifications this year under the president's program.

Moreover, federal regulators said the pace of loan modifications has been increasing steadily since last year.

Given the findings, Dean Baker, codirector of the Center for Economic and Policy Research in Washington, D.C., said Willen's suggestion to give money to borrowers rather than lenders makes sense.

The number of foreclosure proceedings increased to 844,389 during the first quarter of 2009, up 73 percent from the first quarter of 2008, according to the Office of the Comptroller of the Currency.

"You have more money going to the banks and the servicers than you do to the homeowners," he said. "It would make more sense to just give money to the borrowers."

The $75 billion Obama administration plan, announced in February, provides incentives to motivate companies that service mortgages to make loans more affordable, including $1,000 bonuses for each modified loan and an additional "pay for success" fee of $1,000 a year for three years if borrowers stay current on their new terms.

Willen said the success bonus could have the unintended effect of steering loan servicers away from those who need help the most, and toward only those borrowers most likely to recover on their own anyway. He said that if modifications increase, it won't be by much. "My guess is they are going to help people who are OK, and they are not going to help people who are deep trouble," he said.

Alan White, a professor at Valparaiso University School of Law in Indiana, said lenders could cut down on the number of borrowers who end up defaulting again by giving them more help in the first place. He said too many modified loans don't result in low enough payments. Also, he said, there may be fewer borrowers who can get out of trouble on their own because of continuing difficulties in the economy.

"The servicers are making assumptions that are much too anti- modification," White said. "The servicers have the authority" to help borrowers, "they just don't want to use it."
The study, coauthored by Manuel Adelino and Kristopher Gerardi, also rebuts a widely held suspicion that the holdup in modifying loans is because of investors who control them through mortgage- backed securities. The Fed found no difference in the rate of aid between investor-controlled loans and those that lenders own directly.

Jul 08 09:08 AM

[John Lounsbury:]

Excellent article and discussion. I missed the Fed research paper. This will be very useful in trying to understand where the housing/credit/mortgage markets are going. Thanks.

Jul 08 09:28 AM

[Moon Kil Woong:]

There is no point in modifications unless somehow you give mortgage holders skin in the game. That is: positive equity. Otherwise, continuous default until they are kicked out is is their best outcome. The cost for this is in the trillions considering the breadth and depth homeowners are underwater. And the tide keeps rising.

Jul 08 09:45 AM

[CautiousInv...:]

Excellent.

The risks highlighted by the author underscore the challenges of making mortgage modifications where participation by the banks is voluntary with minor incentives to participate. Understanding these subtle risks may have allowed the administration to design a better housing stabilization plan.

The current plan is not working and few loan are being modified.

Jul 08 09:49 AM

[Gdub53:]

Let's look at it another way. The bank created the money out of thin air. Nothing at risk. Not your neighbor's savings. They get the property, i.e., the money. NOTHING AT RISK. Meanwhile they collected the interest and now they get the house. All the while with no skin in the game. Sound fair? I suggest that's why they prefer foreclosure.

Jul 08 10:10 AM

[Gdub53:]

Remember folks all money is created as DEBT. Out of thin air!!!

Jul 08 10:12 AM

[Carl Brecht:]

Banks in our area are holding on to the foreclosers so that there are not too many homes on the market, in order to keep inventory low and prices up. Also when they get a $100,000. loan paid off, they have $1,000.000. to loan out again.

Jul 08 10:21 AM

[Jeff Nielson:]

Excellent point in your article, Ryan (in fact I bookmarked this for myself).

I have been writing for MONTHS that banks clearly prefer foreclosing on homeowners rather than helping them stay in their homes. And while the Obama regime TALKS about "helping" homeonwers, the reality is that this regime is quietly slipping delinquent homeowners a cheque for $1000 to VACATE their homes.

If people would like to see ANOTHER reason why bankers prefer foreclosure, see "The Bankers Manifesto of 1892" (www.bullionbullscanada...).

Jul 08 10:36 AM

[rm:]

[ true loan modification must include a principal balance reduction that reflects the current market value of the home.]

Once you do that, it fails the NPV test, making it better to foreclose.

You see, this game is more complicated than people think it is.

The loudest commentary seems to come from those who've done the least amount of homework, or have ignored the information contrary to their pre-determined viewpoint.

Jul 08 10:40 AM

[rm:]

[Frank, a Newton Democrat, said he is holding a hearing Thursday on his proposal to provide government loans to homeowners who have lost their jobs and can't qualify for loan modifications and other help because they don't have income.]

Loans to homeowners who don't have income... Hey, didn't we do that already?

["The problem is worse than we thought," Frank said. "The failure to do these modifications means the whole situation stays bad longer."]

He's got it exactly backwards. I cannot believe that someone who's in charge of regulating an industry has so little understanding of the subject matter.

Is he really that ignorant of how this industry works, or is he that far into someone's pocket that he can spout this nonsense with a straight face?

Either way, not good.

Jul 08 10:45 AM

[MinAkkar20:]

RM

I think Barney is both ignorant and deep in someone's pocket. It's pretty clear that his proposition is merely an indirect transfer from the government to the banks. Give a loan to a homeowner, he pays the bank. Homeowner defaults on loan to government, bank gets paid, taxpayer doesn't. Barney is the modern-day Nelson Aldrich, the banks' biggest fundraiser.

On Jul 08 10:45 AM rm wrote:

> [Frank, a Newton Democrat, said he is holding a hearing Thursday
> on his proposal to provide government loans to homeowners who have
> lost their jobs and can't qualify for loan modifications and other
> help because they don't have income.]
>
> Loans to homeowners who don't have income... Hey, didn't we do that
> already?
>
> ["The problem is worse than we thought," Frank said. "The failure
> to do these modifications means the whole situation stays bad longer."]
>
>
> He's got it exactly backwards. I cannot believe that someone who's
> in charge of regulating an industry has so little understanding of
> the subject matter.
>
> Is he really that ignorant of how this industry works, or is he that
> far into someone's pocket that he can spout this nonsense with a
> straight face?
>
> Either way, not good.

Jul 08 10:55 AM

[ain't no fo...:]

Perhaps the banks have just figured out what many pundits still dance around - that until unemployment stabilizes and actually starts to improve, more and more people whose job situation is problematical will merely consider themselves "renters" in their home, waiting for the ax to fall or their job situation to be clarified... so their current mortgage payments are nothing more than temporary placeholders, or rent, until their fate is resolved and they decide whether to stick or disappear. And until unemployment stabilizes and actually starts to improve, home prices will continue to fall and the % of those stuck in negative equity positions with dwindling financial motivation to stay will increase.

Under this scenario, why would a bank wait to foreclose? Its in a no-win situation. They are being proactive - taking a quantifiable loss today rather than what could be a much larger loss in the future. This is a perverse reversal of the "bird in the hand" theory - only this time you kill the bird rather than let it procreate and multiply.

Option Arm resets and recasts are predicted to increase dramatically over the next two years, as well as a new wave of Alt-A foreclosures... many of the Option Arms holders are also considered "renters" - they will stay in a home trying to pay $800/mo mortgage payments for now, but if the reset and recasts off their teaser rates double their payments, they too will have no financial incentive to keep paying on a house with significant negative equity.

Banks may be seeing that tsunami building and deciding its time to cut their losses wherever they can.

Jul 08 11:04 AM

[yellowhoard:]

I've never heard it referred to as a "pocket" before.

I guess you'd have to ask Barney's "friend" at Fannie Mae what he likes to call it.




On Jul 08 10:45 AM rm wrote:

> [Frank, a Newton Democrat, said he is holding a hearing Thursday
> on his proposal to provide government loans to homeowners who have
> lost their jobs and can't qualify for loan modifications and other
> help because they don't have income.]
>
> Loans to homeowners who don't have income... Hey, didn't we do that
> already?
>
> ["The problem is worse than we thought," Frank said. "The failure
> to do these modifications means the whole situation stays bad longer."]
>
>
> He's got it exactly backwards. I cannot believe that someone who's
> in charge of regulating an industry has so little understanding of
> the subject matter.
>
> Is he really that ignorant of how this industry works, or is he that
> far into someone's pocket that he can spout this nonsense with a
> straight face?
>
> Either way, not good.

Jul 08 11:14 AM

[user396040:]

This may be a classic "tragedy of the commons" situation in which an individual lender has an economic incentive to foreclose but the net effect of many lenders foreclosing is to lower real estate prices, induce more deliquencies and foreclosures and ultimately harm all lenders. A way to think about it is to assume that in a given metropolitan area there was only one lender. That lender would have to consider the impact of foreclosure on the overall real estate market because it would affect the value of all of the lender's other loans; while it is true that such a lender might still foreclose in some situations, the cost benefit calculus would be very different than in a situation in which a lender had only a small number of loans in the area. Unfortunately, it is often the case that the only way to resolve tragedy of the commons situations optimally is with government regulation - that's why we have traffic lights. The likelihood that the government will be able to step into a situation like this and do more good than harm is not very high. So what we are likely to end up with is an economic version of the Coconut Grove fire - lots of bodies piled up in front of a clogged exit door.

Jul 08 11:38 AM

[dcb:]

The times did an excellent piece on this this weekend.

Maybe the banks have figured out that the worse they perform the more money they get from the taxpayer. Maybe the banks have figured out that the worse they make the situation for homeowners the more likley they will struggle, and the more likley congress will give them more aid, or add another stimulus. The current market place has incentivized banks to fail, so why shouldn't they.

Before by not changing loans we got a 75 billion dollar program, what more can we get. The only way out of this problem is nationalization, which will be fought by the industry because they wnt and have an unlimited line of finance that the taxpayer will have to pay for!!!

Jul 08 11:39 AM

[reluctantQuant:]

Banks are information distilleries. Which pipeline and cracking process has the optimal throughput, assuming channels are built for both foreclosure and workout? The "managerial decision" on how to allocate the processing is usually driven more by operational throughput than by return forecasting. The boss wants to know how many you got done this month, not whether you made an incrementally better economic decision.

And our economy moves forward based on when this gets done, not how it gets done. Homeownership rate is too high, the marginal owner today shouldn't be an owner. Sorry, but Darwin said so. The bank wants to take its lumps and move on, get this behind us sooner, not cheaper.

good piece, thanx author.
--rq

Jul 08 11:40 AM

[dcb:]

Let us be clear. As of this point every government program involves transfer of taxpayer money to banks. the one that would have helped the most, allowing judges to alter mortages, was quashed by the industry. It is called smoke and mirrors. They pretend to help us while in fact they are really giving money to the banks. great set up if you can get it!!

Jul 08 11:42 AM

[ariesl:]

Since the forclosures are usually done by the bank that is simply processing the loan (collecting the payments) and not the Parties that actually hold the mortgage and loan note. The forclosures are fraudulent attempts to "steal" title to the houses involved. In millions of cases the original loans were sold and resold sold again, then consolidated into MBS's and then sliced and diced into CDO's and sold again in "pieces parts". In such cases no one in the courtroom even knows who owns the mortgage loan note! The foreclosing banks can rarely present the neccessary documents to prove they have the right to make a claim on the houses. Even old Snidely Whiplash the cartoon banker waved around a document that said "Mortgage". If any of you know someone facing a foreclosurer proceeding, tell them to fight it. The Banks and their lawyers are commiting massive fraud on the homeowners and the Courts.

Jul 08 12:31 PM

[Troyhector:]

The loan modification efforts to prevent the increase of foreclosure rates have not got a huge welcome. The reason is because the lender needs to revise the ‘borrowing terms’ of the troubled borrower who is struggling to repay the loan on time. It also involves reducing the interest rate which is generally not received well by the lender who would lose some margin in the sale. In addition, the revised plan involves cutting the principal amount by reconsidering the financial state of the borrower and hence, it tackles the benefit of the borrower than guarding the interest of the lender.

www.housingnewslive.co...

www.housingnewslive.co...

Jul 08 01:27 PM

[Buckoux:]

The US banks are already "nationalized" via the Federal Reserve and Congress. You just don't realize that they are all in the bag together and taking the taxpayer for a ride. Just as socialism always does.


On Jul 08 11:39 AM dcb wrote:

> The times did an excellent piece on this this weekend.
>
> Maybe the banks have figured out that the worse they perform the
> more money they get from the taxpayer. Maybe the banks have figured
> out that the worse they make the situation for homeowners the more
> likley they will struggle, and the more likley congress will give
> them more aid, or add another stimulus. The current market place
> has incentivized banks to fail, so why shouldn't they.
>
> Before by not changing loans we got a 75 billion dollar program,
> what more can we get. The only way out of this problem is nationalization,
> which will be fought by the industry because they wnt and have an
> unlimited line of finance that the taxpayer will have to pay for!!!

Jul 08 01:45 PM

[Buckoux:]

California has a similar problem. The California legislature has given the public employee unions so much largess in wages, pensions and benefits, in return for reelection, that state employees retire to other states to avoid California's political mismanagement.


On Jul 08 11:38 AM user396040 wrote:

> "This may be a classic "tragedy of the commons" situation in which....."

Jul 08 01:51 PM

[fixed incom...:]

great post. IMO it's not a paradox in the first place. I know some well meaning people believe it, but it is also fodder for politicians, punsters and others who want to demon-ize lenders as the "cause" of the credit crisis. For those people, the "solution" to this "sin" is for the lender to give up their leverage (threat of foreclosure) by pressuring them to modify.

Until proven otherwise, I assume servicers do what is in the best interest of lenders. Each loan is an individual situation and the lender and servicer are in the best position to decide if forbearance is in THEIR best interest (not the borrower's). They have the data, the collection experience and other info on the borrower and the loan to know if modification is appropriate.

Jul 08 02:33 PM

[Mad Hedge F...:]

the problem for the banks is they hve nowhere to hide.Those hoping for a quick rebound in residential real estate prices can now join the realm of Santa Claus, the Easter bunny, and the tooth fairy. The near complete shutdown of the high end housing market has prompted rating agency Moodys to downgrade 344 tranches of 61 securitizations of prime jumbo loans issued from 2002-2004. This is all full doc, high FICO stuff. They were prompted by a jumbo delinquency rate that has skyrocketed from 1% to 6% in four years. Worst hit will be the jumbo meccas of California, New York, and Florida. Wells Fargo and Bank of America were the biggest originators of this limp paper. With the securitization market closed, originators face the unappetizing alternative of keeping new loans on their own books, hence no deals. The only consolation in all of this is that Moody’s is the same company that missed the whole crisis, sold the best ratings to the highest bidder, used a model that couldn’t accept negative numbers for future home price assumptions, and rated junk as triple “A”. If you are looking for another reason to jump off a cliff, check out Clusterstock’s chart of the day showing that the home vacancy rate has shot up to 3%. That works out to 5 million homes, the equivalent of another Chicago.

Jul 08 02:40 PM

[TinyTim:]

Thanks for the excellent article, Ryan.

The concept of self-cure risk is interesting. Obviously, these seriously delinquent borrowers are highly motivated to keep their house since the damage has already been done to their credit. As opposed to people who used the house as an ATM and are upside down, can still afford the payments, but are looking for the mod as a way to reduce the payments.

Can any of the info in this article(and links) be related to short sales? Banks are extremely reluctant with these, although they are picking up lately. A recent trend is for an investor to negotiate a short sale and rent to the former owners.

Jul 08 03:46 PM

[yellowhoard:]

I have one account.

If you have information that I have more than one, you should contact SA and let them look into it.

My guess is you are an angry Democrat and don't agree with my Libertarian views.

Freya, Options Girl Done Sonz and others in the top 50 are there because they are saying what many others are thinking, or are saying something interesting.

I'm guessing that you're the one who scored me down 70 points today.

This probably took a lot of time. So, perhaps it is you that should get a life.

And, it's "you're" a moron.

Jul 08 05:37 PM

[Mono:]

yh

said this to kid dynamite before with a spammer...your too good for that. come on now. he has been posting that on all the top 10 and they are all just repeats. did it with freya too

don't worry about and don't play into it

Jul 08 07:26 PM

[CGG:]

Would like your insight into the following.

I heard that banks will be able to go back 5 years to restate net income for tax purposes. This "law" is in effect through the end of this year. Therefore all losses due to foreclosures this year will be used to restate past earnings which would result in significant tax benefits to the banks. Seems that this would be an incentive to take short sales in lieu of mortgage modifications as these banks saw significant earnings over the last 5 years.

Does anyone know whether this is indeed factual. I have a friend who is losing the modification battle with Wells Fargo.

Jul 08 08:30 PM

[Mark54:]

Another dynamic is the second (third) lien debt on these homes... why would a first lien position lender modify a loan that is clearly going to recover 100% of the first 50% of the second mortgage? Thus a short sale seems much more profitable than a mod for the first lien holder. Home equity lenders appear to be ones getting the losses. Correct me if I am wrong but a recovery <100% for the first lien holder is a 0% recovery for every other lender with secured interest in that property.

Jul 08 09:42 PM

[optionsgirl:]

Right, but so many of those banks actually hold the first and second positions. They did something called "piggyback" mortgages. Let's say a home buyer only had a 5% down payment. The lender would give him a conventional 80% mortgage (meaning the lender is acknowledging a 20% deposit), then an equity line for the other 15% the borrower was missing from his
down money. This is also called an 80-15-5 mortgage.
Even the VA and FHA mortgages allowed the seller to sell his home at a higher price, then "give" the buyer money for closing costs. They had an appraiser come out and give the OK.
So, let's say the seller wanted $100K for his property. He would sell the house for $103K, pocket $100K, and give the $3000 to the buyer on the HUD-1, to pay for bank fees, appraisal, title insurance, bank points, whatever. You'd think that someone who can't afford to pay for his title insurance would run into a problem if a major mechanical system failed in his new home, and that person had no business buying. We can be sure that the loss of a job would be the clincher! The lenders did this with the full force and guarantees of the US federal government behind them.


On Jul 08 09:42 PM Mark54 wrote:

> Another dynamic is the second (third) lien debt on these homes...
> why would a first lien position lender modify a loan that is clearly
> going to recover 100% of the first 50% of the second mortgage? Thus
> a short sale seems much more profitable than a mod for the first
> lien holder. Home equity lenders appear to be ones getting the losses.
> Correct me if I am wrong but a recovery <100% for the first lien
> holder is a 0% recovery for every other lender with secured interest
> in that property.

Jul 08 11:10 PM

[cameroni:]

Beautifully said Ryan and right on the money.

Banks are fully aware of the market conditions, are closely watching the declines in real estate, monitor the Case Shiller and Government stats and know when it is time to get out with the "least" loss.

It's just business. Maybe unsavory to some but they're actions make just plain good sense from a loss/gain perspective.

Jul 08 11:57 PM

[Seth Chalnick:]

Its true modifications are sketchy. But one way to materially improve the situation is to stop giving them to people who have missed payments. These folks have no credit profile left to defend. They have already proven they will default when the going gets tough. Meantime there are thousands of folks who have paid on time and they can't even get their banks to talk with them about a modification because they haven't been late yet. This is completely backwards.

Jul 09 01:44 AM

[FloridaBoy2:]

Taxpayer funds were pumped into the banking system because of greed and poor business decisions. Now they will make business decisions that will benefit their bottom line going forward. They are borrowing at near zero, raising rates and fees on cards which may cause foreclosures to increase. Principle and interest loan modifications will not be done because it does not benefit the bank.
People that did live within their means and are now out of work and may slip into foreclosure. It's a wonderful world if you are a bank.

.

Jul 09 06:19 AM

[lefty37:]

Solve the housing crisis?
SIMPLE!
Bring our imported jobs back, and the problem will fix itself.
17 million more people could afford homes, and cars.

Jul 09 07:17 AM

[kebu77:]

"A new paper (.pdf) by Federal Reserve economists Manuel Adelino, Kristopher Gerardi, and Paul Willen argues that securitization is a red herring."

Maybe the real conclusion (based on only 3% principal-reduction (PR) mods) is that lenders holding the non-securitized mortgages are institutionally stupid for not more aggressively pursuing PR mods.

When the countervailing pressure of bankruptcy, and bankruptcy attorneys' involvement in the mod process, is allowed for homebuyers on the same basis as residential property investors and commercial real estate investors/developers, a meaningful case-by-case loan mod process could take place that, beneficially, would benefit both borrowers and lenders/investors.

The legal prinicple is that disputes are best settled at the lowest level, e.g., an out-of court bankruptcy settlement or pre-bankruptcy loan mod settlement.

This, rather than some grand top-down government-run scheme that, due to lobying influence, is compromised so much as to little targeted relief (while, at the same time, benefitting folks who could not get a low-level settlement due to their financials - - you walk-away artists, we know who you are).

Jul 09 10:46 AM