Banks Balance Foreclosures With Loan Modifications

Struggling homeowners who are at risk of losing their home to foreclosure have virtually no option but to apply for a loan modification from the bank. This time consuming and frustrating process has helped some homeowners keep their investment, but has been nothing more than a wasted inquiry for the majority of applicants. This disparity has led many to ask where the disconnect lies. How can so many applicants not qualify? How eager are the banks to rescue these toiling homeowners?

Paul Long asks, “Is it really more profitable for the lender to foreclose instead of help?”:

“It’s questionable as to whether or not it’s ‘more profitable’ for the lender to allow the loan to foreclose. It might be more accurate to say it’s ‘less unprofitable.’ Lost money is lost money, no matter where you lost it at. In the case of the homeowner who is likely to be back in default in 6 months, a year, two years, it defers the date of the ‘loss,’ pushing it back however long the borrower can continue to make payments. It’s also true that the foreclosure process itself costs money. Money that, if the lender stops mid-processing or fails to meet certain mandated timelines, they will have to spend again when they start over from the beginning. And can end up an unnecessary expense. Homes that the lenders do foreclose on create their own circular problem. The foreclosed owner couldn’t sell the home for what they owed on it because the foreclosed, bank owned (REO or Real Estate Owned) properties already on the market have driven the price of homes down. The homeowner doesn’t sell and the lender forecloses, the house becomes an REO and goes on the market for a ‘cut our losses’ price.”

Unfortunately, the banks have a bigger picture to worry about. Saving every loan would be fiscal suicide, especially when the likelihood of the loans defaulting again is very high. Not rescuing any loans would not only create negative public sentimen,t but it also crushes the already hurting housing market. Finding a balance between these extremes seems to be what the banks have aimed to do, and yet the number o fforeclosures continues to increase.

Click through to read Paul Long’s full post.

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